Capital is the lifeblood of a business and practically every business goes through financial trouble at any point in time during its entire lifespan. To resolve cash flow issues, businesses turn to small business loans as an effective means of financing. Thanks to FinTech solutions, companies can access high loan amounts easily.
While exploring business loans, borrowers must be attentive to choosing a suitable loan tenure considering various factors. Here is the post that can help borrowers seeking finances choose the right business loan tenure with clarity on its implications for the dynamics of businesses.
What Does Loan Tenure Mean Exactly
Loan tenure refers to the length of time during which the borrower needs to repay the borrowed funds to the lending institution. Generally, loan tenure varies with different financial institutions, and depends on loan type and amount primarily.
Lenders offer different types of business loans, like small business loans, commercial vehicle loans, business loans for self-employed individuals, MSME loans, loans against property, loans against securities, etc. Each loan is provided for a specific period and borrowers can choose a short-term or long-term tenure as per their financial conditions. When individuals apply for a business loan, the loan tenure option can be 12-60 months.
How Loan Tenure Affects Businesses
A borrower’s choice for a loan tenure holds the potential to affect a business in significant ways. Here are a few significant impacts and reasons:
- Monthly Cash Flow
Companies should consider their cash while choosing the business loan tenure. Short-term loans result in higher monthly instalments that can impact the business’s cash flow. It may disrupt financial management and impact the monthly cash flow situation. Since loan repayment is among the prioritised expenses, they may need to reshuffle the monthly budget. Customers can utilise a loan EMI calculator to choose a suitable tenure for a convenient monthly instalment.
- Increased Total Borrowing Cost
The monthly loan instalment towards the loan depends on the chosen tenure. A long-term loan results in a lower amount of loan EMIs (Equated Monthly Instalments) as it spreads the loan amount over a long period. While many may be tempted to opt for a longer-term loan to reduce the financial burden, it may increase the borrowing cost. Lenders charge a higher rate comparatively on long-term loans as compensation for risk exposure. On the other hand, shorter loan tenure can be availed at a lower rate comparatively.
- Financial Flexibility
A shorter-term loan allows companies to be flexible financially. Simply because the company becomes debt-free sooner and gains financial freedom as they can allocate funds towards other crucial growth plans or investments. Companies with longer-term loans limit their ability to pursue other opportunities.
Loan Prepayment – Get Rid of Debt Sooner
Favouring businesses, lending institutions allow borrowers to repay their loans even before the maturity of a loan. Loan prepayment refers to making a lump sum payment towards partial or full loan repayment. This is how a loan prepayment helps borrowers:
- Reduced Interest Cost: Usually, business loan prepayment reduces the monthly installment. Simply because the loan principal reduces with the loan repayment. A lower principal amount results in lower interest costs as the loan outstanding balance is the base to calculate interest.
- Improved Credit Score: When a borrower prepays their loans, it indicates their responsible financial behaviour and better creditworthiness. Such high creditworthiness can help businesses to improve their credit score.
- Financial Freedom: Loan tenure is a deciding factor for loan interest rates. Reduced number of years in loan repayment tenure results in reduced interest. Whenever a borrower prepays a part of a loan, he/she may request the lender to reduce the loan tenure. By repaying the loan sooner, customers can gain financial freedom to utilise their funds in other business activities.
Calculate Savings on Loan Prepayment
Just like selecting a suitable tenure, it is equally crucial to choose the loan prepayment option carefully after considering a few aspects.
First, borrowers should consider the loan prepayment facility during the first half of the loan tenure because the interest component in the loan EMI is larger during the initial years of the loan tenure. It can help to increase savings on the overall interest cost. Interest cost reduces gradually and becomes the least during the later years of the tenure.
Second, borrowers should apply for a business loan after considering the prepayment charges. Lenders may impose prepayment penalties on borrowers. It is a small percentage of the outstanding loan amount. While moving towards prepayment, borrowers must ensure that it doesn’t offset savings from the prepayment.
This way, loan prepayment helps borrowers to reduce their debt burden and save on borrowing costs. A home loan partial payment calculator is a ready-to-use tool to calculate the effect of prepayment on a loan. Using this free tool available at the lender’s official website, borrowers can calculate their savings and decide if it is worth prepayments.
The Conclusion
Understanding loan tenure and its intricate relationship with effects businesses is vital for entrepreneurs seeking flexible business loans. They can decide on a suitable loan tenure considering their financial position and anticipated cash flow. It should be a convenient tenure with a manageable EMI and reduce total borrowing costs. Make an informed decision to access required funds through a business loan and accomplish growth, innovation, and expansion for long-term success.