Annual payout provision on business loans: What is it?

Definition of Annual payout provision

When a business has to payoff their loan to $0 once per year.    When business loans are approved, lenders sometimes have this annual payout provision requirement.

In most cases, banks most often are the institutions that may require annual payout provisions on business loans.   The loan typically has to be paid down to zero at least once per year.  This is a major negative that borrowers should be very cautious about.  This may seem like a minor aspect of the transaction, but could end up being very hard for the business to do.   For business loans that do not require this, click below.

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Borrower considerations

If a business loan annual payout provision is not met, what can the lender do? If the company does not pay out the loan one time per year, then does the lender have the right to call the loan?  Will they raise the interest rate?  Do they have the right to take some or all of the collateral?   Can they liquidate any listed stock or bonds that were put up as collateral?  If so, how likely is it the lender may do this?   Will they do this fast or only if the long goes very far past due?   These questions need to be asked.   The borrower may have put up free and clear collateral such as real estate.

The borrower needs to consider the requirements if real estate is required for the transaction.   If the transaction is for a larger amount, $100,000 or more, the borrower must consider their cash flow during the year.  Even for businesses that have Gross Sales over $1,000,000  per year,  coming up with $100,000 is challenging.

The business should consider their average monthly bank balance as an estimate of the most they can come up with to meet an annual payout provision.  That amount is the maximum they should have on their loan during the year.

Business Loans with annual payout provisions.