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- Analyze your business budget to see where loan payments fit
- Adjust your plan based on actual revenue and expenses
- Make extra payments to repay the loan early, but beware of prepayment penalties
You did the work to take your business to the next level and applied for a business loan. Then you got approved. So, now what? Once you find the right business loan and funds are disbursed, you should have a plan to manage loan payments.
Managing a business loan is key because you don’t want to end up with a delinquent loan. As of Q2 2023, 1.01 percent of all small business loans were delinquent, according to the St. Louis Fed. To avoid delinquency, you’ll need to know how to manage loan payments within your budget and what to do if you run into financial hardship.
1. Prioritize payments in your budget
A business budget is a calculated plan for managing money in a small buisness, including income and expenses. When you sign a loan agreement, take note of the monthly payment amount. Then, make a plan for setting this money aside, and prioritize this in your budget above less important expenses.
Optional business travel, investments or new equipment may not make sense if you can’t make your loan payment.
What happens if I miss payments on a business loan?
If you miss a payment on your business loan, you may end up with a loan in delinquency. When you have a delinquent loan, the lender may seize any collateral you used to secure the loan.
Miss enough payments, and the lender will send the loan to collections, damaging your credit history. At this point, you’ve defaulted on the business loan. The lender may sue you for the remaining loan amount along with interest, fees and penalties.
If you’re having trouble managing loan payments, you may want to chat with a business accountant. If you do this early, you can reorganize your finances to keep up with loan payments and avoid default.
2. Adjust your plan based on actual revenue
Looking at your updated monthly cash flow is important for managing your business loan long-term. Some months bring slowed revenue or unexpected expenses, while others bring in much more than planned.
If you have a slow month, you may need to eliminate some expenses temporarily to make your payment. If you make extra revenue, think about applying it to your loan payment or setting aside money for future loan payments.
Adjusting your financial plan according to your monthly actuals is especially important for business lines of credit. This type of loan lets you draw from it multiple times up to the available credit limit. Despite the flexibility to use it when you need it, make sure your business can currently handle all debt payments. That way, you don’t end up using your entire credit line without being able to repay it.
According to the 2023 Report on Employer Firms by the Federal Reserve, businesses with employers have had to weather many financial challenges in the past year. That includes 54 percent experiencing difficulties paying operating expenses and an equal share of seeing gaps in cash flow. A whopping 81 percent faced challenges with rising costs, including goods, services and payroll. Forty-two percent took action against their financial challenges by getting a small business loan.
3. Track your spending
Thorough bookkeeping helps you understand your cash flow across months and seasons. You can then use that information to adjust your loan repayment strategy. It also keeps you from mixing spending categories or misusing loan funds.
If this is your first time managing a business loan along with regular funds, use these tips to help you stay on top of accounting.
- Open separate business accounts. Keep your business expenses separate by having dedicated business checking and savings accounts.
- Keep track of your receipts. Receipts help you categorize spending and give proof of spending when it’s time to review expenses or file taxes. They can also help you catch errors in your records.
- Use a spreadsheet or accounting software. Use a spreadsheet or dedicated bookkeeping software to keep your business spending organized. Tracking helps you divide your debits and credits into individual categories for better tracking.
- Work with an accountant. If you struggle to manage money in your small business, consider working with an accountant to help you budget effectively.
Over time, your record-keeping will help you understand your cash flow across months and seasons. You can use that information to adjust your loan repayment strategy. If, for example, you’re often flush with cash mid-month, that might be the best time to send in your loan payment.
4. Make extra payments, if possible
When you have extra revenue in your business, consider putting more money toward your loan than the minimum each month. Paying extra saves you in interest charges over time and lets you pay off the loan early.
The downside is that you won’t be able to reinvest the money into your business or into purchases that would expand your business. You can use a loan calculator to compare how much you could save with extra payments versus sticking to the payment schedule and freeing up capital.
Let’s say you have a $50,000 loan with a 10-year repayment period and an APR of 6 percent. With no extra payments, you will pay around $16,610 in interest over the life of the loan. But if you pay an extra $100 each month, you reduce your total interest to about $13,130, saving you around $3,500.
When paying off a loan early, some lenders charge a prepayment penalty to recoup some of the interest lost. The penalty charged may range from 1 percent to 5 percent of the loan amount, which can considerably offset any interest you save. Be sure to add the fee to your business loan calculations to see if the savings are worth it.
5. Refinance if appropriate
Refinancing your small business loan can help you take advantage of changing circumstances and save money on your loan. Refinancing may make sense if better interest rates are available or if you have significantly improved your credit since applying for the loan.
But refinancing doesn’t make sense if the loan fees outweigh any money you’d save from the refinance. Common loan fees include origination fees or loan closing costs that can cost 2 percent to 5 percent of the loan amount. Appraisals for assets you use to secure the loan can also run a few hundred dollars or more, depending on the type of asset. If you are considering refinancing, calculate every cost to determine if it’s the best decision for your business.
6. Communicate with your lender
If you find yourself unable to make your loan payments, communicate your financial state to your lender as soon as you can. The lender may be willing to pause payments — called deferring payment — or restructure to a new term if you don’t expect your financial situation to improve.
In a worst-case scenario, the lender may work with you on debt settlement, allowing you to pay back only part of the debt. But debt settlement can affect your credit history for several years, especially if you use bankruptcy to settle the debt.
The bottom line
Keeping track of your finances and prioritizing loan payments in your business budget are the keys to successfully managing loan payments for your business. If you find yourself in a difficult season financially, you can speak to a financial advisor or accountant to help you tackle your payments.
Frequently asked questions
Your business should be able to handle business loan payments comfortably in your current budget. One way that lenders review how much debt you can handle is by calculating your debt service coverage ratio. The ratio compares your operating income to current debts, dividing these two total amounts. Lenders like to see a DSCR of 1.25 or higher to make sure you can manage debt payments.
A business budget lists your business’s revenue and expenses in detail, broken down by year, month and week. The budget should include forecasted revenue as well as actual revenue to date. It should also list all expenses, including one-time, fixed, variable and seasonal.
Paying off a business loan early is beneficial if you want to save on interest. Most loans calculate interest before each payment. But you’ll be using up capital in the short term because you’ll likely need a sizable amount of cash to pay off the loan. That’s capital you could be using to grow in other areas.