Hello all!
I took out a business loan in 2018 of $1.5M, which was 5.5%. The balance is around $450K, so the interest is 11% as of today. I reached out to our lender, and they are willing to shave off .25%, which is nothing, and option two is to lower the payment by adding an additional ten years. So, interest will accumulate. The payment will go in half or even lower. I will carry a long-term debt. But I can make a larger payment toward the principal and free up some cash flow when I have large sums of money. Business is doing well, and I can make the current payment with no problem, but watching so much cash flow going towards interest and payment is not sitting well with me. Also, my debt ratio is good; unfortunately, SBA products are hard to convert to traditional loans. So basically, my bank is saying hey, look, there is a way to lower your payment, but you will pay more interest when all is set and done. I told them I might sell the business one day before the date and could walk away with the asking price and valuation.
I really don’t know what to do. I can make monthly payments with no problem, but it’s just insane to watch 11% toward interest. If I take the lower payment road and let them review my statement, etc., I can free up some cash.
I would personally shave off the debt, throw the maximum at it and finish it fast, yes you might not have high cash flow, but after paying that debt you will have enough freedom and a much higher cash flow allowing you to invest in the business without much risk, and probably at lower cost than what you have now
This is my ultimate goal. I got it down to 450K.
I would take the additional 10 year term on the loan but make sure that you can still pay it off early (they like the 5-3-1 prepayment penalty model). Give yourself the breathing room to increase your cash flow in the short term and you can always pay more principal. It doesn’t change your interest rate problem, but if they are offering better terms, I would take them but still have the goal of paying it off as quickly as possible.
So, I’m just looking at amort calc online.
My current payment is around $10k. Like you said, this doesn’t change my rate problem. It just lowers my payment, and I must focus on tackling the principle in huge chunks. I don’t want to get comfortable and just let it ride the new term and keep making monthly payments. I really want to get this done and pay them off. I have five years left on it. With new terms, it will drop to $5,500 or lower. If the Fed decides to roll back on the hikes in 2024-2026, the loan rate might decrease to 7-9, but that’s if. But I can use an extra 60-70K which will free up my cashflow. Which I could literally use to pay the principle or hire a new person.
Interest rates can also go up. In the last inflation cycle they thought they had it beat and lowered rates but they ended up going even higher.
this is kind of ridiculous “I’m sick of paying interest, should I extend the time frame of the loan and pay EVEN MORE interest?”
Call a loan broker. If you can wait it out, rates will eventually drop a little.
At least the interest is tax deductible. That brings the effective rate down quite a bit, assuming your business is profitable from a tax standpoint.
Since your lender will let you extend the term, you should probably do it but keep paying the same amount and only drop your payment down if you hit a cash flow crunch. I personally tried to get out from under my SBA debt as quickly as possible given it was personally guaranteed.
Extend term if no prepayment penalty and continue making same payments you are.
You pay down loan faster bc excess payment will go to principal. You’ll also have more breathing room to invest in other areas given lower payment if you choose. Also having more time to potentially refinance if rates come down in next few years.
Source: CFO adviser to multiple businesses in my area with focus on capital markets and capital structure.
How does this work? If you extend the terms, doesn’t more go to interest in the beginning?
Interest accrues on the outstanding balance monthly. If the rate is the same on both options, you will pay the same amount of interest in the first month. The difference in total interest paid results from the lower payments - when you stretch the amortization over a longer period to lower the payment, you pay off less principal with each payment. The next month, your outstanding principal balance is higher in the longer term option, so more interest is charged.
If you’re wanting to reduce the total interest paid, you have to pay down the principal faster by paying more than your minimum payment, or reduce the interest rate. If you’re wanting to lower the total payment amount (size), then extending the amortization will lower your minimum payment, but will increase the amount of interest paid in total over the life of the loan.
If you extend the term at the same rate, your minimum payment will be lower, but as long as there’s no prepayment penalty, you can pay excess cashflow toward the principal to reduce the balance and the interest charged in the future. This lowers your leverage to cushion downturns but also holds your total interest paid at the same amount your initial loan if you continue the same payments.
If you’re wanting both a lower payment and less interest charged, you will have to refinance into a loan with a lower rate. Good luck doing that right now. WSJ Prime is 8.5%, and most loans will be a spread over that. Money was artificially free for the last few years. This is no longer the case.
“Business is doing well, and I can make the current payment with no problem”
Could you have obtained fixed interest rate loan back in 2018?
Same. Prime + 2 over here. It’s killing me, but at least we can make the payments. For now.
Congratulations on getting the loan paid down to where it’s at today! I am in a similar situation dealing with an 11% SBA loan. We are just gritting our teeth and working to get the last $170k paid off in the next 6 months to a year.
It’s already been echoed, but I am thankful for the SBA loan as it has helped me get to where I am today without significant cash out of pocket. With that being said, the 11% makes me sick and we are aggressively paying it off.