If your cash flow changes from month to month, as it often does for owner operated small businesses, then watch out for fixed monthly payments.
Imagine a $10,000 debt with a fixed payment of $500 per month; and imagine the same $10,000 debt with no fixed monthly payment, or just a small monthly interest payment. Both must be paid in full at the same time. Which is more risky for the debtor?
The fixed payment loan is almost always far more risky. Why?
If something interrupts cash flow, illness or injury to a key revenue generator, road construction or building repair disrupts business for a few weeks, an unexpected expense is incurred, anything can quickly make a fixed monthly payment loan delinquent or in default.
Loans without a large regular fixed monthly amount are safer because a lower payment can be made until cash flow recovers.
Our lending institutions have a love affair with fixed high monthly payment, mortgages, leases, rents, equipment payments, and all sorts of other things. They don't seem to realize in many cases this actually increases their risk of default. If the lender really wants to generate passive income then why burden borrowers in this manner?
Therefore if you have fixed payments borrow less and have a larger cash reserve.
If you can get money without a fixed monthly payment then use it whenever possible.
This is why a credit card with a low monthly payment may be less risky than a fixed payment loan with a lower interest rate.
I think the only time a fixed payment loan is preferable is if you don't believe you have the discipline to pay without it.
I hope this helps you,
Rick
P.S. As you move into becoming an investor looking for passive income this is worth paying attention to. You may be able to generate a greater rate of return by making the payment terms match the cash income stream of the borrower.
