It can be tempting to try to finance capital purchases with the shortest-term loans possible. I don’t think anybody really likes debt, so we want to get out of it as quickly as we can. Shorter loans also tend to come with lower interest rates, lowering the overall cost of borrowing money.
But that lower interest rate comes at a cost – it increases the borrower’s risk. Short-term loans have higher minimum payments, and require you to service the debt regardless of what else happens in your business.
Cash is king, and it pays to stay flexible. You never know what crises or opportunities might come your way to change the availability of cash in your operation.
You can always pay off a loan early, but it’s much harder to extend it once you’ve signed the loan documents.
(By the way, it’s never advisable to use an annual crop note [a cash flow loan] to finance capital purchases. Borrowing on a long-term note and paying it off the same year is a much more prudent course of action.)
But that lower interest rate comes at a cost – it increases the borrower’s risk. Short-term loans have higher minimum payments, and require you to service the debt regardless of what else happens in your business.
Cash is king, and it pays to stay flexible. You never know what crises or opportunities might come your way to change the availability of cash in your operation.
You can always pay off a loan early, but it’s much harder to extend it once you’ve signed the loan documents.
(By the way, it’s never advisable to use an annual crop note [a cash flow loan] to finance capital purchases. Borrowing on a long-term note and paying it off the same year is a much more prudent course of action.)
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