There are a lot of things to consider when running your business and one of those considerations is cash flow. When arranging your commercial loan, it is always appropriate to consider the loan term. Alternatively, you could be looking to refinance and grow your business in the new year and need to adjust your commercial mortgage to suit your business needs. One of the things you will need to consider when taking out a commercial facility is what type of loan term you would like to commit to.
What is a Loan Term?
A loan term is the amount of time lenders provide you to pay out your mortgage without having to complete an annual review on your current financial position. For businesses, you are now able to have up to a 30-year loan term from the previous loan term of 15 years. Loan terms are an important part of your commercial mortgage as they assist in reducing repayments and provide extra cash flow for you to invest into the business. The lower the loan term the higher the mortgage repayments are going to be.
For example, if you have a $500,000 debt with an interest rate of 4%, you could choose a loan term of 15 years in which the repayments will be $3,698 per month. Or you could choose a 30-year term loan where the mortgage repayments reduce to $2,387 per month.
Why are Loan Terms important?
Loan terms are extremely important to your business as you want to keep your expenditures as low as possible. The lower your repayments are each month, the better your cash flow will be and remember cash is king.
If we use the example above on a 30-year loan term, you will have an additional $1,311 each month to purchase stock or reinvest back into your business. If the funds are not required at months end you can always put this towards your loan if you prefer.
Frequently Asked Question: Rent or Commercial repayments?
One of the most common questions our clients have is which is better: outright purchase with commercial loan repayments or renting the same property?
In our experience with commercial property space, we have found that businesses may pay up to twice as much when renting a space instead of utilizing a commercial loan with a 30-year loan term. Take the example below:
A business can own a $1 million property with a loan amount of $800,000 on a loan term of 30 years and with a 4% fixed interest rate, this business’s mortgage repayments will be $3,819 per month. Or a business could rent the same property space and pay additional management fees for approximately $7000 + GST + outgoings per month
It’s almost a no brainer what would be better for your business.
Find the right commercial property specialist
Melbourne.Finance is not like the big banks; we won’t just turn around and tell you no. As a small business ourselves we understand that improving your cash flow is important to you and that you don’t want to be paying higher commercial loan repayments if you don’t have to. Our team will provide you with honest advice and loan term options that suit the needs of your business, whether that be as a tradie, retailer, or professional service. Use our finance repayments calculator to see what types of mortgage repayments you could be looking at or get in contact with our team to find out how we can help your business.