Question for a financial advisor… or someone who just knows the answer.

[Larry B]

My wife and I want to loan the company she works for some money as an investment. The company is moving to a new building and needs renovation funds. The owner plans on paying us back within 6 months but not necessarily in monthly payments. The contract reads “lender will lend borrower $… with interest payable on the unpaid Balance at the rate of 6 percent per annum, calculated semi-annually not in advance”. This contract was written by the owner (borrower).

The way my wife and I understood a loan was, the owner would pay us interest on the unpaid Balance each month. So for example if we lent $5,000, the borrower could make payments towards the principal as big or little as needed but the interest would still be applied to the remaining balance each month. So if she wanted to give us our $5,000 back at the end of the 6 months, she still would have owed us the 6% interest each month on the $5,000.

We tried explaining that to the owner and she seemed to have a different understanding. Reading her wording in the contract, what does that sound like? 

[Utahute72]

Not a lawyer or financial guy, but I think the phrase “…calculated semi-annually,” means that the interest would only be accrued on a semi-annual basis (so at the end of six months).

[Larry B]

Ok so basically if she paid us back in full before 6 months, she wouldn’t owe any interest?

[PlainsUte]

Not a lawyer, but I would interpret the “semi-annual calculation” to apply as long the loan is still open and expect a pro-rated share of the 6% when the loan is repaid for any period less than 6 mos.

 

6% seems cheap for a business loan, by the way. Also be sure there is an explicit due date on the note, even if it is 5 years from now.

[leftyjace]

Bottom line is, if there’s anything questionable or ambiguous have it put in the contract explicitly, including pro-rated interest. Compounded semi-annually literally means that no interest is calculated until 6 months in. So you need to put a clause in that either doesn’t allow for early payoff, or if there is early payoff, interest is calculated on a pro-rated basis at that point.

[PlainsUte]

and for any partial period after that.  Otherwise they can pay off the loan at 11.5 months and essentially get your money for 3%.

Rates being paid by Business Develepment Companies to shareholders for writing mostly SECURED loans to businesses:

Main St Financial 6%

Prospect Capital 10.5%

TICC Capital 14%

[Utah]

I’d look into an “On Demand” loan. 

[Anonymous]

Interest monthly, period.

Have you looked at the company’s financials for the past 3 years? What do their projections look like? Will you get a blanket lien on the company’s assets. These are all things a bank would want. Otherwise, you’re talking unsecured loan to a commercial business and the rates should be in the 10% to 14% range.