What Is An Interest Only Loan?

There are plenty of options available for businesses to finance their expansion plans. At White Oak, we have a wide range of business finance products to help supercharge the growth of your enterprise.

When it comes to interest-only loans, they can be used by businesses to access funding, as well as improve cash flow. This type of loan is useful for seasonal businesses such as hospitality where the money they make fluctuates month-on-month.

We have put together a guide to help you navigate interest only loans for business owners who are looking to access finance for their enterprise.

What is an interest only loan? 

In terms of what an interest only loan is, it’s a type of loan where the borrower only pays interest on the 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, which results in lower monthly payments over a fixed period of time.

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.

How does an interest only loan work?

An interest only loan works by paying the interest first over the debt that you owe. This type of loan is very flexible as you can pay back the loan and borrow again. It’s worth noting that the interest-only payments of the loan don’t last forever as you have to eventually repay the loan balance back.

 

Pros and cons of using an interest only loan

For a business owner, using an interest only loan comes with its fair share of pros and cons. It’s worth doing your research first before you decide to take the leap with applying for this type of loan for your business. 

Pros of using an interest only loan

For business owners, interest only loans have many benefits that can enable a business owner to keep their enterprise afloat. Here are some of the pros of using an interest only loan:

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, it can help lower your business’ operating costs, as well as other expenses. Interest only loans are great for seasonal businesses that have irregular income coming in each month.

Cons of using an interest only loan

While interest only loans can be useful for business owners, it also comes with its share of issues. Here’s some of the cons of using this type of loan:

Risk of going underwater 

Businesses who 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 they were originally owed by the lender, they’ll have to pay more than the initial amount they took out.

Where does an interest only loan work best in? 

Interest only loans can be incredibly beneficial for businesses who 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.

Covering the VAT commercial property purchase and waiting on payment of services are just a few things that work best with this type of loan. There are many other ways that the loan can be used well by business owners, which includes commissioning the development of equipment that you’re looking to sell on the market.

Conclusion

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’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’s finance expert who will help to see if your business is eligible for a business development loan.

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If you are looking to find the right finance for your business, contact us today.

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