I have been offered an loan for my small business up to $138,000 with a rate on
the unpaid balance floating rate of the Prime rate plus 2.75% adjustable quarterly. The repayment term is 10 years and a capital injection of $13,000.
What do they mean by a floating rate of the prime rate? How do I calculate my Quarterly repayment amounts? Is it the unpaid balance divided by the prime rate plus 2.75%? The capital injection amount is to be construed as a down payment of $13,000?
Thanks for your question. Floating rate loans are not unusual for business loans. The way it works is that the lender will provide you with a loan and your payments will change as interest rates change (or “float”). In your case, the interest rate of your loan will change based on the prime rate.
Because your interest rate will change as interest rates fluctuate, your repayment amounts will also adjust. The easiest way to see how is by asking your lender for sample amortization tables based on a series of potential interest rate changes. That way you can see how your payment will change with interest rates.
Dividing your unpaid balance by prime + 2.75% would equal your payment if your loan was interest-only. However, assuming that your loan is fully amortized (as most business loans are) this would not include the principal portion of your repayment. For this reason, your best bet is to work with your lender to get some sample amortization tables as described above.
From the situation you describe, it sounds like the $13,000 referenced would be similar to a down payment – an equity injection required by your lender to keep your debt-to-equity ratio in line with their lending standards.
I hope this helps and your loan works out for you. If you decide that you’re interested in looking for other loan providers or maybe arranging a different type of loan, be sure to check out our article on the Best Small Business Loan Providers here: https://fitsmallbusiness.com/kabbage-vs-ondeck-capital/