The Rate Is Lower. The Payment Is Higher.

A typical situation looks like this. An owner brings a loan offer to her monthly meeting with the bookkeeper. The bank will replace her business line of credit with a five-year term loan, and the interest rate drops from 12% to 10%.

“Two points lower. That’s money we can put back into the business.”

The bookkeeper turns to the payment schedule. The current line requires interest each month. The new loan starts paying down the balance immediately, and its monthly payment is more than twice as large.

The owner hasn’t misread the rate. She has mistaken a lower interest charge for a lower withdrawal from the bank account. With a supplier payment approaching, that difference matters before she signs.

For this hypothetical business, the useful question is how much cash the new agreement requires and whether customer receipts can cover it. A lower rate gives the advisor one number to check; the repayment schedule may change the answer.

The owner wants to get the debt under control. Help her see what that commitment will require from the business each month.

A credit headline won’t settle this offer

The Dallas Fed’s October 26 credit conditions survey gives this conversation some urgency. Among 283 responding Texas business executives, 35.3% said the cost of credit available to their firm had increased over the past year; 46.3% selected not applicable.

Responses were collected October 13-21 from manufacturing and service businesses. These are regional survey responses, not a national small-business estimate or a finding about refinancing results.

The obvious response to more expensive credit is to look for a better rate. That may be sensible. The missed question is what else changes when the owner accepts the offer.

A revolving line and a term loan can have very different repayment requirements. Moving the same balance between them can reduce the first month’s interest while increasing the cash required that month. The proposal needs a review of both effects.

Ask the owner to bring the current agreement, recent statement, and complete proposed payment schedule. Start with the actual balance being refinanced. A rate comparison becomes misleading if the offer also adds borrowing, finances fees, or assumes a different closing balance.

Separate interest from repayment

Return to the hypothetical company. Assume it owes $240,000 on an interest-only line at 12%. Using a simple annual rate divided by 12, interest is $2,400 a month while that balance stays unchanged.

The proposed loan refinances exactly $240,000 at a fixed 10%, repaid through 60 equal monthly payments. Standard monthly amortization gives a payment of about $5,099. A separate $2,400 closing fee is paid from cash, not added to the loan.

In the first payment, interest is $2,000. About $3,099 repays principal. The first month’s interest is $400 lower, but the required payment is about $2,699 higher.

That principal payment reduces what the business owes. It isn’t another operating expense, and it doesn’t mean the loan is bad. It still leaves the bank account on the payment date.

This is where an advisor can make the financial statements useful. Show the owner the interest charge beside the reduction in debt, then show the combined withdrawal. An income statement alone won’t explain why the checking account needs more money.

These are planning figures under stated assumptions. Actual lender calculations may use daily interest, different first-payment periods, or additional charges. Verify the schedule instead of treating the illustration as a quote.

Also check whether the old line closes at payoff. A dollar paid against a closed term loan generally doesn’t become a dollar the owner can borrow again. Losing that borrowing access may matter during the next inventory cycle.

Give the new payments their own dates

Build the 13-week cash forecast from the current agreement first. Include scheduled interest and any required principal, with customer receipts based on actual collection history. Keep the supplier payment that prompted the conversation visible.

Then copy that case and replace the old financing with the proposed terms. Remove the old payment only when the refinance would actually settle. Enter closing costs and each new payment on its expected bank date.

If proceeds go directly to the old lender, don’t treat them as new cash available for payroll. Reconcile the payoff and proceeds so the forecast neither invents spendable money nor counts the payoff twice.

Suppose three monthly payments fall inside the forecast, with the closing fee paid at the start. Compared with three $2,400 interest-only payments, the proposed loan requires roughly $10,498 more cash during that period, including the fee. This comparison assumes the old balance and rate remain unchanged through those three payments.

That figure measures the added cash requirement during this window. It doesn’t compare the full lifetime cost of the loans. The term loan is also reducing debt, while the interest-only balance still has to be repaid.

Inspect the lowest balance in each case against the owner’s chosen operating reserve. Check daily timing around payroll and the supplier due date; a weekly ending balance can conceal a shortfall earlier in the week.

Now test a late collection using a real customer’s payment history. Keep the debt schedule fixed. The owner needs to see whether the new commitment still fits when an expected receipt slips.

Decide how the business will carry repayment

The review may show that the company can handle the new payment comfortably. Paying down a balance that never seems to fall could be a useful commitment. The advisor should explain that benefit alongside the cash requirement.

If the reserve is breached, trace the cause before recommending another loan. Is the shortfall tied to one collection date, or does the business lack enough recurring cash to support principal repayment? A temporary gap and a lasting payment problem need different responses.

Evaluate only options the lender would actually consider. A different term or closing date might change the pressure, but longer repayment can increase total interest. Get revised terms in writing and rerun the cash schedule before counting on them.

Look beyond week 13, too. The existing line’s maturity, renewal conditions, or required paydown may make keeping it impossible. An interest-only payment doesn’t erase the balance or guarantee an extension.

This follows the Clear Path To Cash discipline: identify the repayment issue, understand its drivers, compare feasible actions, and model the cash before the owner commits. Record the lender questions and the next review date with the decision.

Back at the meeting, the owner can still favor the 10% offer. She now has to explain how the company will fund the larger payment while meeting its supplier commitments. A cheaper loan can still ask for cash the business doesn’t have.

Clear Path To Cash Advisor gives advisors a system for applying this work, supported by the training and practice in Advisor Membership. The advisor verifies the terms and helps the owner weigh the choices; the owner makes the borrowing decision.