Having debt hanging over your head is never pleasant. I know it’s tempting to pay back a loan as fast as you can, but the impact on your business from this zealous endeavor can be devastating down the line.
The trade off for a long amortization period, of course, is that you’ll end up paying more interest over the lifetime of the loan. With term debt, the principal paid each period is the same and the interest changes as the principal balance decreases. Slowly chipping away at the principal, instead of making large payments over a shorter period of time, means that the interest will be hanging around for longer as well. But for an entrepreneur, the long-term flexibility is usually more important than the long-term financial impact.
Structure your loan so that you have the longest amortization possible, with low monthly payments and no prepayment penalties. It will give you the greatest flexibility for your future. Make sure that you can comfortably repay the loan and have enough cash left over each month to cover all necessary operations with a cushion for unexpected hardships. You'll be thankful when the next recession hits and your monthly payments are $1,000 instead of $3,000.
If there's an unexpected low cash flow period, you’ll have the money you need to pull your business through because you won’t be scrambling to make high monthly payments. If business growth is steady and the cash is flowing in, then you have the option to pay off more of the principal but not be forced to in lean times.
While it’s a great feeling--and can be really smart--to get out of debt, it’s always best to plan for the unexpected. And that means never having to scrimp in other areas of your business to make a high debt payment.