All businesses feel a bit jittery when we talk about paying back a loan. Business owners believe that they need rigorous preparation and strategy to pay back loans for business because it is a difficult task. But, financial management and debt planning is straightforward process.
Most lenders demand the repayments soon after the first month of the loan. It can vary depending on the loan type you have applied for and the lender. Discuss this with the lender in advance and make a repayment plan that fits your business’s cash flow and monthly income.
What are repayments for the small business loans in Australia?
The returning process of the borrowed money to the lending institution is known as loan payback. You can repay the loan through a monthly instalment series, known as equated monthly instalments (EMI). The EMI amount comprises the principal as well as the interest payments.
You can pay a fixed amount of money back to the lender every month. The borrower pays the principal amount and the interest to the lending institute on a particular date of each month. This process continues till you have to repay the entire loan amount throughout the loan term.
A common misconception is a principal and the interest amount is equally divided in an EMI. However, this is not always the case. The interest component of business finance Australia is higher during the initial months of the loan duration. The interest amount decreases and the principal amount increases as the loan duration progresses.
How do lending institutions calculate business loan repayments?
What is the most significant consideration before applying for loans? Well, most business owners look at the cost of financing and are most concerned about this. But, borrowers pay attention only to the interest rate or Annual Percentage Rate (APR).
Unfortunately, they miss out on many other vital factors and later get surprised loans for a business repayment plan that turns out to be costlier than they thought they would be.
Going into the financial market to get a loan with no knowledge can be a deadly mistake for your company. It is your responsibility to gain expertise on the topic for the benefit of the business. We will guide you to choose the best option through this blog post. The borrowers have a common misunderstanding that they consider the interest rate and annual percentage rate (APR) the same.
The lender charges you a certain percentage of the total loan in exchange for offering small business loans in Australia. It is known as the interest rate, also referred to as the nominal interest rate by some people. The interest payments are distributed over a certain number of periods throughout the loan term, and its calculation is quite simple. You have to multiply the percentage of the periodic interest rate by the number of periods in one year. Consider only those years during which the interest rate is efficient. It will give you the total interest amount you will be paying against the loan.
The interest rate based on the above formulation does not include other charges that the lender may take from the borrowers. These charges include transaction expenses, exit fees, application charges, early loan termination fees, and many more. Lenders for Business finance Australia have different criteria and fees, depending upon the loan type you choose to apply for. The principal amount indicates the amount that you have borrowed. However, the summation of interest and principal amount does not convey the best image of how much a loan will cost you in the long run. That is why we say that merely looking at the interest rate is not an ideal way for selection.
Ways to make business loan repayments easier
You might now have an idea of how loans for business repayments work. But the question remains, how to manage financial planning to pay back strategically? Here are some ways that you can follow to make the loan repayments easy.
1. Equated Monthly Instalments or EMIs
Equated Monthly Installments, commonly known as EMIs or Equal Monthly Instalments, are a common way of repaying the lender. You pay a fixed amount to the lender every month throughout the loan term. Every instalment contains a specific portion of principal and interest.
Some lenders for small business loans in Australia enable the option of pre-paying to their borrowers after paying a set of payments. Some institutes also charge prepayment fees if you wish to pay off the loan earlier.
The total portion of the loan reduces when you pre-pay a part of your loan. You tend to save interest payments because the lenders apply the interest on the new lower principal. The term full pre-payment refers to the act of fully paying off the loan before the expiration of the term.
2. Balloon Loan Repayment
You can pay back some business finance in Australia in a single lump sum using the balloon loan repayment technique. In this option, you have to pay the interest of the borrowed funds every month. As the loan term ends, you can repay a single-lump payment to return the main loan balance completely.
Summing It Up
Paying back your company’s debt may appear like a daunting process. But trust us, it is not. With proper knowledge of the subject and the best financial planning, you can repay the loan within a fixed time with no difficulty.