Guide to Interest-Only Loans
At White Oak UK, we have a wide range of business finance products to help supercharge growth and maximise potential. Our different types of loans vary in amount, repayment period and eligibility criteria and we work with each of our clients to build a bespoke finance package that works for them.
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Interest-only loans are a great tool for businesses that need to access funding and maintain consistent cash flow. A useful stop-gap for seasonal businesses in particular, an interest-only loan can be a good option for expected slow periods in industries such as hospitality and agriculture. Below, we’ve put together a quick guide to help business owners navigate interest-only loans.
What is an interest-only loan?
An interest-only business loan is a type of loan where:
- You only pay the interest charges on what you’ve borrowed
- For an agreed period of time
- Until you repay the lump sum at the end of the agreed period
This ultimately means lower monthly payments until the end of the repayment period, where you’ll need to make a large payment. Many businesses finance this through selling an asset, refinancing the loan, or using other available funds. The purpose of an interest-only loan is for short term one off lends where the customer has a specific purpose with a specific end date event that can be used to pay back the loan.
How does an interest-only loan work?
The exact loan and repayment process will differ from lender to lender. At White Oak UK, an interest-only loan agreement will be structured similarly to the following:
The customer borrows a sum for 3 months, then makes 2 monthly interest only repayments and then in the 3rd month makes the final interest repayment plus the bullet (capital) amount. Or, the facility can be renewed for another 3 month period if required. Normally, the loan will be repaid at the end of the 3-month period, however, longer end dates will be considered, with the 3-month loan term being renewed where acceptable. Examples of ideal scenarios would be where a VAT Rebate from HMRC is due, or another payment.
Am I eligible for an interest-only loan?
The eligibility criteria for most of our business finance products is that you have:
- Been trading for 3 years or longer
- Have a track record of profitability
- Suitable interest-only loan purpose requirement
You can check your own eligibility online with our free, fast eligibility checker.
The benefits of choosing an interest-only loan
For a business owner, using an interest-only loan comes with various benefits, including increased flexibility, resilience and opportunity. The two main benefits of interest-only loans are:
Helps free up cash flow
For business owners, having low monthly repayments can benefit their cash flow, meaning they are then able to invest in other areas of their business. Whether that’s in recruitment or research and development, it gives you peace of mind knowing that you have the finance available to invest in your business.
Lower monthly repayments
Some business owners choose to use interest-only loans as it’s the only type of business finance they can afford. By choosing this type of loan, you can keep operational costs covered, as well as other expenses. Interest-only loans are great for seasonal businesses that have irregular income or periods of low demand followed by busier stretches.
Secure an interest-only loan to boost your business
Interest-only loans can be used by businesses to help them purchase essential assets, as well as fund business expansion plans they have lined up. It’s worth getting some financial advice first before deciding to take out this type of loan for your business.
White Oak UK’s business development loans can help not only improve your cash flow, but also make a long-term investment in your business. We can help make those goals become a reality for your enterprise.
If you’re looking to find the right finance for your business, contact White Oak UK’s finance experts, who will help to see if your business is eligible for a business development loan.
FAQS – Interest-Only Loans
How does an interest-only loan differ from a normal loan?
Unlike most loans where your monthly repayments go towards the loan balance and interest costs, with an interest-only loan you don’t repay the loan amount – just the interest until the end of your agreed period, which results in lower monthly payments over a fixed period of time.
What scenario is an interest-only loan best for?
Interest only loans can be incredibly beneficial for businesses that need a cash injection to help them with repairs, product development and much more. To fully maximise the use of this type of loan, there are certain scenarios where the loan can be used by business owners to its full potential. These include:
- Covering the VAT on a commercial property purchase
- Using the funds as a stopgap while waiting for payment
- Developing products or prototypes that you plan to release to market
How does the repayment method work?
The repayment method for the interest-only loan changes when you have to repay the loan you’ve taken out. There are two repayment methods that you can use and that’s either paying off the loan as a lump sum or with higher monthly payments. Whatever repayment you use, you need to make sure you repay the loan to avoid getting into a difficult financial situation.
What are my options at the end of the agreement?
Option 1 – Roll the agreement over. The final payment will be the 3rd interest payment, the old agreement will be contra settled and the new will then be set to live.
Option 2 – Settle the agreement in full. The final payment will be the final Interest payment plus the bullet payment. The agreement will then come to a natural termination.
Option 3 – You can request to pay off the outstanding capital amount or ‘bullet’. The new agreement can be proposed for a standard repayment loan product over a maximum of 12 month period.
How many times can a customer roll over?
You can request to roll over the facility up to 4 times before commencing a 12-month amortisation loan.
What are the downsides of interest-only loans?
While interest-only loans can be useful for business owners, it’s essential to understand the risks associated with this type of lending. The two main are:
The risk of going underwater
Businesses that purchase items such as new laptops or cars have to take into consideration that these assets depreciate overtime. If you leave the unpaid principal balance untouched, you risk having to pay off the loan at a higher value than the current asset value in order to keep your business running.
Vulnerable to servicing a debt
With taking out a loan with interest it can leave the business owner vulnerable to servicing a debt, as they may forget the exact amount of money that they have been loaned. If a business owner puts off paying the principal the lender originally owed them, they’ll have to pay more than the initial amount they took out.
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