Never just pay the minimum: SBA EIDL for instance
Hi fellow small biz people. Like many of you, we found 2020 to be a very hard time. We were grateful to get (and get forgiven for) 2 rounds of PPP, and we also got an EIDL loan, without which we would not have survived the year.
The EIDL didn't start accumulating interest until the payment schedule started 1 year after signing. The minimum payment was laughably low. But I knew that only paying the minimum was a bad idea, so I threw the numbers at a spreadsheet to see HOW bad it was. VERY educational.
Loan amount: $100,000
Interest rate 3.75% per year ( so another $312.50 a month)
Minimum payment: $488 a month (so you barely are paying more than the interest)
If paying only the minimum, it ends up like this:
30 years to payoff
$59,950.68 in interest
But, by paying $2000 a month instead:
5 years to payoff
$9,683.75 in interest
I just wanted to share this so that you can see it doesn't pay, to pay the minimum! That $2000 a month may be hard, but it saves so much time and money.
Posted Aug 5, 2021, 10:20 PM UTC
yes, but with the first one you get 30 years to pay back 160k, the second you get 5 to pay back 110k. Obviously you save on interest with the second, but what if you invested that $1,512 every month into improving revenue of your business or your family, kids, whatever. I imagine you would make a lot more in extra revenue in those 5 years then 50k.
This, that is why those debt repayment terms are so nice. Same even if you did do minimum payments for a bit and then after year 3 had amassed enough profit to pay off the loan in full. Okay, could do that, but maybe can use that $100k now to invest in a new product line, buy more inventory, purchase more ad spend, etc.
It is basic financial sense for a family or a W2 employee, but as a business need to look at things differently and what kind of opportunity those frankly insane repayment terms offers.
At 61 years old, I don't think I HAVE 30 years. I would rather have the pain now then die in debt. YMMV of course.