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I am able to get a zero interest loan (APR 0%) of €10k for my small business and I have to decide the debt repayment period (12-60 months).

Mathematically, because interest rate is zero I should choose the maximum period but I feel worried because it seems too an easy choice. What could be downside risk of this?

Let’s assume I can repay it in full in 12 months. Straight line monthly amortization schedule.

  • Better to pay the loan off slowly and invest the money you would be paying in interest. – James McLeod Apr 15 at 2:04
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    Make sure it is 0 interest FOR THE WHOLE TIME. Not like "0 interest for 3 months". Because this is what they normally are. OBVIOUSLY - 0 interest = max length possible because there is no penalty for time with a 0% penalty per year, but normally they are time limieted 0%. – TomTom Apr 15 at 6:31
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If you have a zero interest rate, then the only reason to pay back a loan sooner than later is if you expect a negative inflation rate. If you suspect that the inflation rate of your currency will go negative in the future, then having a loan is bad because even though its numerical value doesn't increase, its actual value does.

But if you do not expect that, and with everything else being equal, pay back your loan as slowly as possible.

When a company runs a profit, then there are usually much better things to do with that money than just to pay back loans early. Invest it into growing the business or just pay it out to the owners.

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  • "Invest it into growing the business or just pay it out to the owners." But make sure the business remains sufficiently capitalized, right? Leaving a company insolvent because of excessive payouts to the owners is a no-no (abuse of limited liability). – nanoman May 15 at 20:57
  • As I said: when the company runs a profit. Putting your company into debt by paying you a bonus is of course illegal (unless you are a too-big-to-fail corporation). – Philipp May 25 at 12:36
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I would suggest you to avail the maximum length possible, but, pay it sooner. Choosing longer duration gives you a leeway, in case some uncertain thing comes in the way to paying the payment.

Being debt free is one the best things for anybody, be it business or person. Even though you have longer duration, try to pay off as early as possible. Also, see if there are any pre-closure penalties.

Once you pay off loan, you will have more cash flow for your business and you can take further steps.

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    I think your last part does not make sense. If you pay off the loan early, your cashflow may be larger, but your liquidity will be smaller. You make investments (further steps) with liquidity! – Daniel Apr 15 at 12:44
  • What I feel is, there should be a balance between debt payoff and liquidity, so that business does not fall in to debt again. Once the debt payoff is done, more cash flow(due to not having debt) will lead to more liquidity – Venkataraman R Apr 15 at 13:43
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    @VenkataramanR "Feelings" aren't that relevant in business. Companies need liquidity and operative capital in their startup phase. The lower the fixcost for debt repayment the better. And there is little advantage for a company to be debt-free as long as the bottom line of the financial statement is still positive. Especially during a zero-interest period, where taking and repaying debt is really just shoveling money back and forth between assets and liabilities. – Philipp May 15 at 13:41
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Another reason to consider avoiding a long loan period is the risk that comes with loans in general. As long as you have debt, unless you are holding enough cash to pay it off at any time, then you have the risk that one day you'll have a payment due, and not enough money to make that payment. If you don't have a loan, then you don't have those constant payments to worry about; it's one less thing that will be a problem if some day you have no cash on hand for a time.

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