Grace period is a time period in which the loan beneficiary pays an interest rate only for the funds (loan instruments) that are being used. A loan with grace period may be approved for projects requiring certain implementation time (i.e. purchasing equipment with the loan funds); debt collection time, time needed for production materials and stock supplies to be either placed or paid for, etc. Grace period must be justified in the project and cash-flow projection.
Grace period is the period in which the loan is the most expensive since the interest is calculated on the capital amount of the loan. The longer grace period – the more expensive loan at the end of the day. That’s why there is no reason to request grace period for which there is no justification in the very business activities.
However, too short a grace period is also a danger for the overall project implementation, since the requirement to repay the capital amount is due before a new investment generates new income.
Thus, it is of utmost importance for the company owner; person in charge of production/manufacturing activities; consultant working on the business plan and investment program and bank credit analyst to agree on the grace period needed when determining the cash-flow projection and credit proposal.