Every payday loan has some basic features. This calculates its costs as well as the “load” which the company or the project has to “shoulder”. These are:
- The payday loan amount
- The duration over which the payday loan is provided
- The interest rate, ie the price for the release of funds, expressed in% per (usually) year
- The type of repayment
These key characteristics, in their entirety, affect the debt service (interest and repayments) that the company has to pay and are agreed with.
With regard to the mentioned sizes, each payday loan is individually structured. This structure is also negotiated and agreed with the . The payday loan structure thus determines how the payday loan will affect the cash outflow from the company and thus its liquidity in terms of amount and timing. The most important elements of the payday loan structure are the following:
- Payment of the payday loan amount in one or more amounts
- If a discount of a few percent of the payday loan amount is to be applied to the first payment, in which case the interest rate will be slightly lower
- The rhythm of interest payments: monthly, every quarter; on the first or last day of these periods
- The repayment / repayment rhythm: monthly, every quarter, every six months, annually; at the beginning or end of these periods
- Should interest and repayment be combined in an eg monthly fixed amount (annuity) or are the repayments structured separately (amortization), but the interest paid monthly? The annuity is more frequently encountered
- Are there any grace periods – eg at the beginning of the business?
- What administrative or other costs are charged when concluding a payday loan?
Even if it does not happen so often, so we introduce here a few “special elements”. They can be part of a payday loan agreement or maybe even become necessary:
- Special repayments: Always be aware that you must abide by the once-contractual terms and conditions of payment for the entire term of the payday loan. Earlier, unscheduled repayments are possible, but can be very expensive through so-called prepayment penalties. In the end, these prepayment penalties will indemnify the in such a case, as the has also raised money elsewhere (eg on the inter market) on fixed terms. Why? To be able to afford the payday loan to you, because no has the money for lending “so easy in the vault”.
- However, you should definitely negotiate with the an option for early repayment of certain amounts, eg € 20,000 at the end of each year.
- Should certain residual repayments be agreed at the end of the payday loan term?
- Should temporary suspensions of interest payments or repayments come into question?
- Is there a possibility of a general refinancing? This option is usually an extension of the repayment, ie an amortization over a longer period, eg in the face of a crisis.
In general, the last two options can not be foreseen (and wonder if they should be addressed during a payday loan negotiation ………!). However, they must be considered in any case in the event of a financial crisis or serious liquidity shortage. However, it is better to keep your business under financial control and, if necessary, to make the necessary adjustments to spending and perhaps also to the revenue side.
Here’s an example of how the duration and interest rate of a payday loan affects your costs and liquidity. We accept an annuity payday loan of € 120,000, which is paid out in one sum – eg to start your business. Now a very simple, schematic calculation, which, however, makes our thoughts clear and what you should think about:
5 years to 5%: € 18,873 interest and repayment of € 24,000 – per year
5 years to 2.5%: € 9,281 interest costs, balance as above
3 years to 2.5%: € 6,181 interest and repayment € 40,000 – per year
3 years to 5%: € 12.474 interest costs, balance as above
Please note that the payday loan, with the same interest rate, is cheaper over a shorter period of time, as you will not be using the money that long. However, you will then have to repay the payday loan in less time, with the sum of repayment installments and interest payments per year / per month placing your liquidity at a much higher rate than in the long-term case. It’s a good idea to plan alternative scenarios based on your sources of revenue and resources, and figure out what’s best for your cash flow. The or a consultant can give you good help.