How does loan repayment work in a business
Business loan repayment usually means principal and interest deducted monthly, weekly or daily from trading revenue. HomeSec works differently: interest is capitalised for the period the borrower chooses, so nothing is deducted while the loan runs, and the principal is repaid at the end from a sale, a refinance or a receivable. The term is open, and extending costs nothing.
Most business borrowers have only ever seen one repayment structure, because it is the only one banks and cash-flow lenders offer: principal and interest, deducted on a schedule, starting immediately.
There is another, and for a lot of situations it is a much better fit.
Structure one: serviced from trading
Monthly, weekly or — with several unsecured lenders — daily direct debits out of your trading account. Each payment covers interest plus a slice of principal, and the balance falls steadily.
It works when income is predictable and roughly level. It works badly when income is lumpy, because the debit does not care whether this week was any good. If the reason you borrowed was a timing mismatch in receipts, a fixed schedule of outgoings tends to reproduce the problem it was meant to solve.
Structure two: capitalised interest, repaid from an event
Interest is calculated for the period you choose and added to the balance, or prepaid at settlement. Nothing is deducted while the loan runs. The principal comes back at the end, in one go, from the event that was always going to repay it — a sale, a refinance, a certified claim, a receivable.
This is how HomeSec’s loans work, and it changes the question you are asking. Instead of can my trading support another monthly outgoing, the question becomes is the exit real, and is it dated.
A worked comparison
$200,000 for four months, on a business with irregular receipts:
| Serviced monthly | Capitalised | |
|---|---|---|
| Cash out during the term | Four payments | Nothing |
| Effect on weekly cash flow | Immediate and ongoing | None |
| What repays it | Trading income | The sale, refinance or claim |
| If a slow month arrives | Missed payment, default | No effect |
| If the exit slips a fortnight | — | Extend, no fee |
Neither is better in the abstract. If you have steady income and a long horizon, serviced debt is cheaper and more conventional. If you are covering a gap, the second structure is the one that does not fight you while you wait.
The end of the term is the part people get wrong
Nothing happens automatically, and with us nothing punitive happens either. When the period you chose is coming to an end you either repay, or you tell us you need longer and we extend it. No extension fee, no re-documentation, usually one phone call.
That is unusual. Most private lenders write a fixed term of one to twelve months with a minimum interest period of three, and charge to roll it. Which produces the trap: a borrower finished in six weeks pays for three months anyway, and a borrower whose settlement slips a fortnight has a default rather than a conversation.
We can leave it open because we fund our own loans with our own money. There is no fund behind us with a mandate saying when capital must come back.
What you should ask any lender before signing
- What is the minimum interest period — if I repay in week two, how many months do I pay for?
- Is unused prepaid interest refunded?
- What does it cost to extend, and what rate applies after the stated term?
- Are repayments deducted during the term, and how often?
Our answers: none, yes, nothing, no.
Reviewed by Jason Brockmuller, Joint Chief Executive