Video Transcript
Tarek here from Royce Stone Capital, hope you're all well.
Capitalised Interest Versus Paid monthly
Business loans
One of the questions that my business clients ask me when going for short to medium term business private loan is should they get interest and fees capitalized and paid in advance out of the loan amount or should they pay interest monthly?
Now there is no right or wrong because every situation requires a specific solution
but generally speaking if you can't afford to service the loan and you've got poor cash flow or you've got a project and there's a major payout at the end then it makes sense to have interest capitalize and fees etc paid out of the loan amount in advance.
Effective rate of interest on the loan
But keep in mind however what this means though is that the principal capital you're going to get is going to be less, it also means that the effective interest rate is going to be higher as well because of the reduced working capital that you're getting net.
Interest paid monthly
Now on the other side of the coin if you can pay interest monthly the benefit is
you're getting the whole loan amount but it does mean you have to service it
every month but it also puts you in a position of power to negotiate a better interest rate because you've de-risked it for the lender by servicing the loan monthly so keep those things in mind the next time you're looking at a business loan and all the best take care.
A brief overview of interest paid in advance is provided here by CBA (this is for theoretcial examples only).
