Paying off a small business loan sincerely can be very challenging in the current pandemic-induced situation. A survey report of Main Street Lender* highlighted that over 10,000 loan applicants have applied for a business loan and out of which 64% are unable to secure any financing options.
Many businessmen apply for small business loans to survive and sustain themselves in the industry. With the business loan amount, you can fund your marketing campaigns, raw materials, equipment, etc. It is essential to repay the monthly instalments on time. If you fail to do so, it would surely harm the credit score and you may even lose future capital.
The first thing any commercial establishment needs is a great business idea. If your business idea is great, you should never leave any stone unturned in creating a wonderful business model. You can expand your business with a small business loan guaranteed by the SBA** and repay the loan on priority. If you cannot pay your loan repayments due to insufficient cash-flows, you must immediately inform your lender.
As many find out the hard way, the present COVID-19 pandemic isn’t making things easier for small businesses. According to a survey of Goldman Sachs***, nearly 88 per cent of small businesses have fully utilized their Paycheck Protection Program (PPP) loans and are laying off employees
In this crucial time, it is paramount for owners to learn how to pay off their small business loans effectively to ride over this wave of financial crunch. We bring to your attention some proven and effective advice on repaying your business loan without sacrificing much.
Never Apply for a Business Loan More Than Your Worth
Introspection of your financial wealth is necessary. If you are planning to expand your business, you should also plan for the accumulation of funds. Many entrepreneurs apply for a small business loan available at affordable interest rates from financial institutions and banks.
Before applying, you must always consider your risk appetite and repayment capacity. Hence, you must apply for a business loan within the range of your business income. For example, if your business worth is around $15,000, then you can apply for a loan of $12,000-$14,000
Spend the business loan in a ratio of 80-20%
A very popular ratio of 80-20% can help you deal with business risks and uncertainties. An 80-20 ratio means that you should invest 80% of the loan amount into business and save 30% for any emergency need of funds. It is a smarter way to handle the unexpected need for funds or monthly repayments of a business loan. Such emergency funds are very helpful in times of low business sales and off-season, especially when the gross revenues are too low
The option of Refinancing
If you had taken a small business loan at higher interest rates, you can think of refinancing at lower interest rates. Many businessmen apply for refinancing to secure better interest rates and loan terms. It is the best way to generate extra cash, reduce your prepayments burdens, and refinance the existing loan at lower interest rates.
Also, not all loans could be refinanced, which is why you need to take a closer look at the loan terms. Many entrepreneurs commit errors because they do not understand the loan terms. Make sure that before applying for a business loan, you fully understand the terms such as business loan interest rates, prepayment fees, due dates, fluctuation of interest rates, repayment options, etc.
When a business is under debt, a reduction in cost and expenses is an ideal way to run a business. Cost reduction does not mean cutting down essential expenditure. Cost reduction focuses on unnecessary expenses that can be avoided. Identify those critical areas that are essential for a business to run successfully. Then, you can use those savings to repay your business loan effectively.
Maintain a Harmonious Relationship With Your Creditors
To run your business smoothly, you must always maintain good relations with your creditors. When you have a good reputation among your creditors, you can easily strike a great deal for loan repayments. You could negotiate with your creditors regarding loan consolidation programs. You can also provide them with financial statements, tax returns, and bank statements.
Sell Products in High Demand First
An entrepreneur can easily pay off a loan with an increase in income. To generate high business profit, you should always sell a product that is high in demand. Identify your best products that are high in demand to avoid any repayment issues. You can take your focus off on products or services that aren’t’ doing well for the time being.
Today’s businesses use custom-made ERP and accounting software that help to forecast the advantages of cost-cutting and increasing productivity in the long-run.
- The overall cost can be reduced by-
- Using a co-working space
- Selling of unused or obsolete equipment
- Negotiate with vendors to get maximum discount
- Lay off employees
- Purchase office supplies at a cheap price.
Pick a Date for “Autopay” Mode
It’s quite common for business owners to miss paying their loan payments because of their daily stress and busy schedule. To avoid any default in payments, pick a date and choose the “autopay mode” for loan repayments. There is a high probability of forgetting repayments of loans and bills when you pay manually. Hence, choosing a specific date for all repayments is a good idea.
Also, the type of small business loan determines your repayment strategy. An entrepreneur should know the difference between a small business loan and other financing options such as a business line of credit or merchant cash advance. Each one of those has different repayment options, which need to be looked at carefully.