When it comes to taking a business loan, many people focus primarily on their interest rate. In reality, the “term”, or amount of time you have to pay back your total financed amount, is what can really have a profound impact on the month-to-month affordability of your loan. Spreading your loan repayment out over a longer period has many immediate advantages as well as benefits that you’ll feel over time. Here are a few:
- Lower Monthly Payments
The longer your loan term is, the lower your monthly payment will be. Stretching the same loan amount over a longer period of repayment time means that the amount you pay each month is less, even though your principal loan amount is the same. For example, if your principal balance were $72,000 with a typical bank term of 3 years, your monthly payments would be $2,000, plus interest. If you work with a lender who allows you to extend that term to 10 years, your monthly payment would be only $600 a month, plus interest. Your monthly payments could decrease significantly just by securing a longer term.
- Improved Cash Flow
On its own, a loan will improve your cash flow by giving you access to more capital. That benefit is compounded when your monthly payments are lower due to a longer loan term. By extending the length of the loan, therefore lowering your monthly payments, you have more money available each month. This gives you the opportunity to make large purchases or invest that capital for future gains. Especially in an economy that is working to recover, having a robust cash flow is critical for managing unexpected costs and navigating these uncertain times.
- Credit Score Boost
A portion of your credit score is calculated by your “credit utilization,” or the amount of your available credit that you’ve spent at any given time. Having a credit utilization ratio of over 30% can negatively impact your credit score. Using a business debt consolidation loan that doesn’t appear on your credit report to pay down other debts will reduce your credit utilization and can boost your overall score.
Securing a longer term for your business loan can have both immediate and long-term advantages. From improved cash flow month-to-month to a stronger credit score in the future, these benefits can have a long-lasting positive impact. To learn more about how affordable your monthly payment could be with a loan from BHG, try our free payment estimator today.