Whether you’re expanding a business or upgrading your equipment, there’s one thing that you’ll need above anything else: working capital. As the saying goes, you need to spend money to make money, but you may not have the liquid cash for larger business-related expenses just lying around. That’s where a small business loan can come into play.
Loan programs can give you access to more working capital than you might have had with personal funds or revenue alone. But you’ll need to repay that debt and the interest it accrues. That can make small business loan repayment challenging for many business owners, but considering the following tips may help make it easier.
7 steps to paying off a small business loan
Paying off debts is essential for your company’s financial health. Consistently making your monthly payments may show prospective lenders that you’re a reliable borrower, making them more likely to approve you for loans with lower rates and longer terms in the future. On the other hand, failing to repay a loan is often a black mark on your financial history that may keep traditional business lenders from funding your business.
Thankfully, keeping to a payment schedule doesn’t have to be insurmountable. Some simple information-gathering and planning can go a long way.
1. Understand the business loan terms and conditions
The loan application process will introduce you to many financial terms you might not know. Understanding these terms can tell you exactly what you’re getting into when you sign a loan agreement. While the list below won’t cover every possible loan detail, these are likely some of the most common things you’ll see:
- When to start repaying. After qualifying for a loan, you’re generally expected to begin making loan payments immediately after receiving the funds, according to the terms. For instance, on a monthly repayment schedule, your first payment is due after 30 days.
- Loan amount. This is simply the amount of capital your lender is giving you. This amount will vary depending on the type of loan you’ve taken out.
- How to make payments. This refers to how you’ll send money to your lender. Most banks draw the required funds directly from your bank account. A few lenders might allow payments via checks, but watch for an additional processing fee.
- Cosigner. A cosigner is someone who takes partial responsibility for the loan to help a low-credit applicant qualify for a loan. If the borrower defaults on the loan, the cosigner must make the payments.
- Collateral. Collateral is a valuable asset (or several assets) used to secure a loan if your credit history doesn’t meet the lender's requirements. If you default on the loan, the financial institution can seize and sell your collateral to recoup their losses.
- Fixed or variable interest rates. A fixed interest rate means your rate will be the same every pay period. A variable rate means your rate is liable to change depending on certain factors. Typically, the prime rate, which the Federal Reserve sets, is the factor that influences changes to variable interest rates.
2. Seek help if you have problems with repayment
If you know you’ll have trouble repaying the loan, contact your lender as soon as possible to seek alternative options. Most lenders prefer consistent payments over having to hunt down their money. While it’s not a sure thing, your provider might be willing to make a different arrangement with you in the case of financial difficulties.
3. Set up autopay
A very easy way to avoid missing payments on your small business loans is to sign up for automatic payments. That way, the lender deducts the necessary funds from your bank account without you having to remember to do it yourself. However, it’s important to keep track of your autopay in case your cash flow leaves insufficient funds in your account. Catch this early so your bank doesn’t charge you overdraft fees.
4. Know your lender's late payment policy
Unforeseen circumstances could mean that you miss a payment period. In that situation, it’s important to review your lender's late policies so you know what options are available to you. Every financial institution handles late payments differently, so make sure to do the necessary research in advance so you aren’t blindsided by hefty late fees.
5. Consider loan refinancing options
If you’re struggling to repay your loan, you may be able to get better terms and conditions. Refinancing a loan essentially means transferring the debt to another lender and following the terms and conditions they set for your repayment.
Generally, small business owners refinance loans to lower their monthly payments or get lower interest rates. However, some simply want to “graduate” to better loan terms after their company has grown. For the latter, most businesses try to qualify for an SBA 7(a) loan. You can use these loans for debt refinancing, and they’re renowned for their long repayment terms, lower interest rates, and larger loan amounts.
6. Keep track of your business finances
Knowing how much money comes into your business per month – and how much goes out – is vital for repaying your debt. A careful eye on your month-to-month revenue can help you anticipate financial trouble before you feel the effects. This way, you can take precautions if your cash flow gets so tight you’re worried you can’t repay your loan. Act sooner than later, and your lender might be more lenient about late fees and or other penalties.
7. Make a budget
Making a budget can help you track what goes into and comes out of your account - and when. Having that knowledge available at a glance can give you more control over your finances and make you less likely to overdraw your account.
Tips if you’re struggling to pay off your loan
Repayment tips alone won’t make you immune to financial troubles. Sometimes, a business can run into hardship through no fault of your own. While challenging, there are things you can do to help keep your business through it, including:
- Be proactive. Don’t retreat even if you're struggling. Assess, pivot, and course correct to make the situation better.
- Discuss options if issues last. You never know what the future holds. Current challenges could be a minor pothole or a long, bumpy road, so it’s best to have options ready to deal with a long-term issue.
- Redirect money towards your debt. If you’re struggling and in danger of missing a loan payment, then it’s likely time to reprioritize your revenue. For example, your business might be spending on subscriptions it doesn’t really need when you could redirect that money toward your loan payments.
- Avoid defaulting. While this may be obvious, the consequences of defaulting simply can’t be overstated. If you put up collateral to qualify, your lender may seize your assets to cover the remaining debt. Even if there’s no collateral, your lender could take you to small claims court over a smaller loan. That could cost you thousands in legal fees and a long term issue with your credit. This is another reason it is imperative to find the right loan with terms you can meet.
Find a loan you can reliably pay with SmartBiz®
Repayment is part of borrowing money, but some loan repayment plans will fit your financial situation better than others. Finding a lender with repayment terms that suit your business can be time-consuming, but SmartBiz can help with its one-to-many application aimed at connecting you with the right capital at the right time. Check now whether you prequalify* for loans that may help fund your growth now and lead to easier repayment in the long run.
*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.