Is interest free finance really free?
Interest-free deals are everywhere. As a small business, the types of interest-free finance you might consider vary from traditional loans, to credit cards, buy now pay later and overdraft facilities. Having access to these products allows your business to free up cash flow and still have the ability to invest.
At face value, interest free loans appear to let you get the finance you need without having to pay anything extra for it. However, the reality can sometimes be different. Some interest-free loans come with periodic extra fees or have an expiry period designed to make it hard for you to completely repay the loan before above market interest rates kick in. Also the total amount payable uner an 'interest- free' loan may be more than under an interest- bearing loan.
Here's what you should think about when using interest-free finance to increase your working capital.
The interest-free expiry period
In many cases, interest-free loans are only interest free for a certain period of time. After this point, you'll be charged interest as normal, and sometimes at much higher rates.
To avoid finance that's considerably more expensive that you anticipated, work out how your repayments fit into this time frame. You may need to pay more than the minimum monthly repayment in order to have paid off the loan before the interest-free period expires. However, some companies make sure this is difficult by setting a limit on how much you can increase your repayments.
Different types of fees and charges
Companies may offer interest-free arrangements but charge other fees to make up for the money they lose. You might have to pay application fee, get charged monthly account fees or incur expenses when you make a payment or change the details of your account.
It pays to read the contract carefully to ensure you're aware of these fees before you sign up for your loan. These types of charges add up quickly and could impact whether you can actually afford the repayments within the interest-free period.
Check if you are getting the best price
It’s common knowledge that the best price is normally offered for cash. One of the advantages of lining up a loan in advance means you negotiate the purchase price. The vendor is avoiding paying any merchant fees to the financier (which they usually do for 'interest free' products). It’s a good idea to shop around and work out the total amount you pay over the loan term under and 'interest free' loan and the total amount payable under a loan with interest. The results may surprise you.
Using assets as security
As with any type of business loan, your lender could ask for assets or your personal property as security against the loan. If you're looking for interest-free finance because you're concerned about your ability to repay and the interest you'll accrue over time, be sure you understand how your assets could be used if you default on payments. Given the lender isn't making money from you during your interest-free period, they may have ensured they have watertight provisions for profiting should you have trouble repaying.
Working with Classic Funding Group
As finance providers to businesses of all shapes and sizes, our aim is to help companies succeed. We have a range of customisable products designed to help business owners access finance without worrying about where it will leave their business.