Business lending

Short term business loans with prepaid interest

Prepaid interest means the interest for a chosen period is deducted at settlement rather than billed monthly, so nothing falls due while the loan runs. HomeSec prepays interest for up to six months on property-secured business loans from $20,000 to $5,000,000. If the term needs extending there is no fee, and unused interest is refunded on early repayment.

Prepaid interest sounds like a lender’s trick and is usually the opposite. What matters is not whether interest is prepaid but what happens to the part you do not use.

How it works

Interest for the period you choose is calculated at settlement and deducted from the advance, rather than billed to you monthly. Borrow $200,000 for six months and you receive the advance less six months of interest.

The effect is that nothing falls due while the loan runs. No monthly payment, no direct debit, nothing to service from a trading account that may be the reason you borrowed in the first place.

Why that structure exists

Because this kind of lending is repaid from an event rather than from trading. The loan is waiting on a sale, a refinance, a certified claim or a receivable. Asking a borrower to service it monthly out of the cash flow that is already under strain would defeat the purpose.

For a business with lumpy receipts it is the difference between a facility that helps and one that quietly makes the problem worse each week.

The question that actually matters

Is unused prepaid interest refunded if you repay early?

Ours is. Many lenders’ is not, and that single term is worth more than a difference of half a per cent in the headline rate.

Take $200,000 at 1.5% per month with six months prepaid. Repay in month three and the unused portion is roughly $9,000. A lender that refunds it and one that keeps it are quoting the same rate and charging very different prices.

Separate from prepaid interest and often confused with it. A minimum period is a floor on what is charged regardless of when you repay — commonly three months, sometimes six. Repay in week two and you still pay for three months.

We have no minimum period. Borrow for eleven days and you pay for eleven days.

And the other end: extending

Interest is prepaid for a period, but the period is not a deadline in the way it is with most lenders. If you need longer, tell us. There is no extension fee, no re-documentation charge and no new establishment fee — interest simply continues at the same rate for the extended period.

That is only possible because we fund our own loans with our own money and have no mandate requiring capital back on a date.

Four questions to ask any lender

Is interest prepaid, and for how long?
Is the unused portion refunded on early repayment?
Is there a minimum interest period, and how long?
What does it cost to extend, and what rate applies afterwards?

Ours: yes, yes, none, nothing.

Reviewed by Jason Brockmuller, Joint Chief Executive