Have you been wondering how to pay back small business loan with relative ease? A strategic plan is just as good as honoring your financial commitment.
You have finally received your small business loan, which you will use for inventory management or as additional cash flow and working capital for your enterprise. Problem solved, you think? Well, that’s only less than half the battle for the entrepreneur. Because now it’s time to work doubly hard so you can fulfill your loan repayments. Not paying your loan will impact your credit score and your ability to secure business financing in the future. In other words, repaying your small business loan is an obligation that should not be taken for granted. Nonetheless, some ways can help you deal with your monthly payments more responsibly.
Apply for a small business loan you know you can repay
Don’t borrow the money you can’t pay back – it’s plain common sense. A loan is neither a grant nor free money; it is debt meant to be returned to the lender, including interest payments. Lenders are business people just like you; they earn from the money that you borrow from them. Exercising prudence is key in paying off your loan payments with ease. Taking out a loan may be part of your strategic business plan. But when you borrow more money than you can repay, it will throw off your amortization schedule. Worse, you may find yourself deep in even more debt and sleepless nights.
Select the most convenient loan term
As a rule of thumb, the higher your loan amount, the better you can manage it with a longer repayment period. Unless your business is raking in huge monthly sales, spreading out your monthly payments for five years or more can help give you a little more room to deal with all your other payables. The longer term will also depend on the type of business loan you have, the type of lender, your loan purpose, and your financial profile. Hence, it’s important to take into account all the other factors before you make such financial decisions.
Traditional lenders like banks and credit unions will allow many small business owners to repay their short-term loans between five and seven years. This term is based on a minimum 3-year business tenure, strong credit, and profitability, among other things. On the other hand, alternative lenders with less stringent requirements can approve a repayment period for up to five years.
SBA guaranteed loans give leeway but are more difficult to secure given their heavy documentation, stricter guidelines, and longer processing time. Their longest repayment term is 25 years and has the most reasonable interest rates you can find. When you avail of the CDC/ 504 loan to purchase equipment, real estate, or any major business assets, you also get to enjoy a longer repayment duration. For equipment loans, they allow up to 10 years, while real estate doubles that at 20 years.
Line of credit
While a typical business line of credit is repaid much quicker, usually six months to 1 year, you can stretch it up to four years, depending on your lender agreement. However, having a longer term may not be favorable for those in constant need of quick cash. The sooner you can “refill” your credit line with repayments in a shorter time, the more you can easily fund your future financing needs.
Review your actual loan terms and conditions
While you must have fully understood your loan contract before you signed it, it won’t hurt to review them again after that. It’s easy to forget the details once the loan is released to you.
Set up your payment mode
Borrowers would prefer a more convenient way to settle their loan payments which an automatic debit or autopay system will provide. You can accomplish it by enrolling your account in the system, where it will automatically deduct the amortization or fixed amount from your business bank account through ACH. This autopay guarantees that you don’t miss your due date granted that your account is sufficiently funded. Some business lenders allow you to choose the day of the month that your autopay will execute. Meanwhile, other banks continue to accept mailed checks as loan payments but usually include a check processing fee.
Paying for Small Business Administration SBA loans
There are three ways to make monthly payments on your SBA loan. One is accomplished online at Pay.gov, a payment portal for everything related to the federal government except taxes. The source of funds for this payment method could be your ACH, debit card, or PayPal.
Another way to pay is to do it online using your personal or business bank account. You will have to include US Small Business Administration either as a one-time or recurring payment recipient and use your 10-digit SBA loan account number located in your billing statement. Please note that it is different from your loan application number. Meanwhile, you can also send in a check made payable to the US Small Business Administration.
Paying for EIDL loan
When you availed of the Economic Injury Disaster Loan, you can also repay it via Pay.gov using your 10-digit loan account number. If you took out more than 25,000 dollars, you’d need to pay 100 dollars as a UCC filing fee. Always verify your business credit report after your UCC-1 filing has been released. It will also be crucial for those with personal guarantees, especially when securing another small business loan. Any remaining lien can hamper your future small business finance applications. In comparison, you will need not pay back an EIDL grant or EIDG since it is essentially free money given by the government.
Your loan payment frequency
Bank loans typically follow a monthly amortization schedule. However, more lending institutions are now allowing more frequency options, including weekly, bi-monthly, and even daily repayments, which are done on weekdays except special holidays. The latter is used with merchant card advances where a certain percentage of the daily sales is repaid to the loan.
Some small business owners would adopt a repayment schedule every two weeks, making two payments in a month. For example, you pay 1,000 dollars every month with a one-year loan term. When you pay it every two weeks instead, splitting the amount to 500 dollars each, you get to fully pay the loan in 336 days compared to 1 year or 365 days. In other words, you can complete your loan earlier by almost a month. Others, especially retail businesses, also find this arrangement much easier to budget for.
Fixed and variable repayments
Aside from frequency, your monthly payment may be fixed or variable. A fixed repayment scheme is the same amount billed according to frequency during the loan term. Borrowers have no option to pay less or more under this arrangement.
On the other hand, variable repayments may depend on two factors. If you have a variable interest rate business loan, the annual percentage rate will depend on the prime rate. Any movement will prompt a change in the repayment amount. It is usually available in a business line of credit and a long-term loan.
The other reason you might have variable repayments is that you are paying back your merchant cash advance. In effect, this type of loan has no definite maturity date since it relies on your business’s cash flow.
Take note of late payment penalties
Being a responsible and disciplined borrower will positively impact your credit history. One way to exemplify it is to pay on time. It shows that you can manage credit, making you more attractive to preferred lenders. A single late payment that constitutes your payment history is a form of delinquency. The longer it takes you to pay beyond your due date, the worse it may get. It will not only affect your credit score but you also get penalized for it. Hence, it is worth knowing how much your lending institution charges under the circumstances or if they have a grace period without penalty and a negative credit score. For strict lenders, paying a day late may already be counted as past due.
Create a repayment plan and follow through
Just as you have carefully planned on getting a loan, you should also do so concerning its repayment. Cramming is never an option; you will find it difficult to pay, and it reflects badly on your business credit score.
You have to determine how you will allocate funds from your business income. One of the ways to do that is to be frugal in managing your business expenses. It is not uncommon for small businesses to overspend, especially during the first several months of operation, depleting funds that would have been used to pay back the loan.
While all sorts of payables come with being in business, you can still employ money-saving methods that will allow you to have more ability to repay your business loan. For example, if you can still make do with a small office instead of upgrading to a larger space that can cost you more, don’t make that extra spend. Such sacrifices will pay off later; you just have to exercise control and patience.
Monitor financial capacity
You can adjust as soon as your revenues double or triple that will empower you to not only pay for your debts and bills but also afford you other things that you’ve been putting off, like finally getting an air conditioner in the office.
Save some from your business loans
Alternatively, you can also get funds for your repayment from the loan proceeds themselves. Upon receiving your loan, try not to spend everything on your business. Set aside around 20 percent of your proceeds as buffer or emergency funds, which you can use at any time you will be in a tight spot. It can be useful during lean sales, instead of skipping your monthly payments that will only incur penalties that can be more detrimental to your profits.
Tighten data security
Aside from tightening your belt, it would help if you did the same for your data security. Small businesses are highly vulnerable to breaches and attacks because many take this matter for granted, thinking that data hackers are only after big corporations. Hundreds of million dollars are lost from business income to data thieves alone. Strengthening your company’s cyber security will help you save those precious dollars and allow them to loan repayments.
Implement stricter purchase controls
As mentioned earlier, small businesses need to make sacrifices by skipping expenses they can put off until their company has fully gotten off the ground. There must be a purchase approval system to control expenditure to supplement this task. Don’t be too loose with requests for petty cash and the like. Make sure to create an application process for your employees to observe when they require purchases. You can ask them to fill out a purchase form that includes the details and the purpose of their request. This way, the approving officer can filter out unnecessary requests by prioritizing only the more important ones.
Focus on selling profitable items
Once you have identified products and services with high selling power, invest more in them to increase your revenues. Monitoring your sales is key to being more proactive, especially if you notice that certain items are underperforming. There is just more pressure when you have financial obligations such as small business loans, personal loans, and other loans; there’s no room to relax. Nonetheless, it will prove to be rewarding for your business later.
Look for new revenue streams
The majority of startups are tied up to business financing and operational expenses that it’s common for entrepreneurs to have almost zero profit initially. To help this situation, you can also augment your business with other means so that not all your income will just go to paying your debts. And besides, it will be draining for the entrepreneur if all his efforts are not paid.
Paying off early
Being able to complete your monthly payments may sound like a better proposition, especially when your business is booming. But is it always the best for you?
When it is beneficial
While it is true that paying the outstanding balance of your business financing in full is unloading a burden off your backs, you should look into your loan terms once again. If you follow an amortization schedule where the interest rate is the priority when your repayments are applied, cutting your loan term short will save you a significant amount. There may be prepayment penalties, but they are usually minimal, so you’ll still have big savings nonetheless.
Another situation is when your business has seasonal sales. If you’re paying fixed amounts monthly, it will prove challenging to do so during your lean season. So when you have extra funds to fully pay your loan and then some to maintain financial health, it would be a wise decision to do so.
When it is not
It would be better to stay the course even if all of a sudden you have been pocketing huge profits when there is no incentive from the lender, such as paying fixed amounts. You have a 2-year loan term with a monthly repayment of 2,000 dollars, for example, and you find yourself equipped with the means to finish it early on the 13th month. If you’ll be paying all your remaining months in one lump sum, saving you nothing in return, it’s much more sensible to carry on with your remaining term instead. You can either invest your extra cash or spend it on other important projects that will yield earnings for you.
When unable to pay
No matter how flawless your credit history may have been, things happen. While you risk missing your upcoming repayment, all hope is not lost. As a responsible sole proprietor or partnership, don’t wait to get a non-payment notice from your lender. Be proactive by letting them know beforehand. If it’s just a temporary issue, you may request your lender not to put it in your credit record when you can make payment during the extension provided to you.
For a secured loan, your collateral may be in the bubble when your loan defaults but communicate with your lender nonetheless. Although some offer financial protection to a small business owner, business lenders are generally willing to meet halfway, whether that’s providing you with a moratorium or restructuring your loan. Whatever solutions you can come up with to carry on with your loan, they are also inclined to support your business to get back up to its feet. Ultimately, the lender wants to recoup their money whatever means necessary.