As an example, if you borrow £400,000 over 15 years (at, say, 8%), you will have annual repayments of £45,871 but your accounts will only show the interest cost of £31,480 in year one, with this decreasing over the term of the loan.  However, if you were to borrow the same amount over 25 years, the annual payments would be £37,047, with the year one interest cost being £31,810.  Your accounts will only show the interest cost and not the capital repayments, so you might make a profit but what does your cashflow look like?

When purchasing a new asset, you do not want to borrow for longer than the life of said asset.  New machinery may last a few years so you will borrow short term.  However, buildings last a long time and land lasts forever.  In these cases, a long-term loan may be more appropriate.  It is now common for new loans to come without early repayment charges and so you can always overpay when cashflow allows.

It is essential to consider the most suitable loan term, based on the purpose of the loan and your business’ cashflow requirements.

Please contact Sophie at sophiecahill@fcgagric.com or your local FCG Office, if you want to talk through your finance agreements and future cashflow requirements.

Midwest Consulting Limited is regulated by the Financial Conduct Authority and is a registered credit broker FRN793780.