How to manage a fast business loan
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Over the course of most businesses, there may be times when you have an immediate need for cash. A vital piece of equipment may have broken unexpectedly. Or vendors may be delinquent in their payments, causing you to have a cash flow problem at the same time you must make payroll.
With many business loans, it can take weeks or months to receive funding. For example, an SBA loan can take 30-90 days for approval and funding.
But, there are lending institutions, mostly online lenders, that offer loans with fast financing times. However, these loans typically have short terms and high interest rates. That makes careful loan management important.
5 tips for managing your fast business loan
Due to the higher interest rates often associated with fast business loans, it’s critical to manage them properly so you don’t end up defaulting on the loan or owing additional money.
1. Prioritize your payments
Since these loans typically come with higher interest rates, you don’t want to be late on payments or miss them entirely. That will add late fees on top of the higher cost you’re already paying to borrow the money. As you prioritize your bills, your payment for a fast business loan should be at or near the top of the list.
If money is tight and you’re struggling to make this additional payment, look at other things you could cut out of your budget, like monthly subscriptions that are nice to have but aren’t necessities.
2. Use automatic payments
The best way to make sure you’re never late or miss a payment on your loan is to sign up for automatic payments. However, you need to have a steady cash flow so the funds will always be available when the payment is withdrawn from your account.
This strategy is especially useful if your fast business loan requires daily or weekly payments that could be hard to keep up with manually.
3. Increase your monthly payment
The repayment amount on the bill is the minimum amount you must pay your lending institution each month. However, if you can pay an additional amount each payment period, this will decrease the total amount of interest you must pay. When you have good months and your accounts receivables are higher than expected, you may want to direct some of those additional funds toward your fast business loan.
If you’re using automatic payments, you’ll need to manually make a second payment with the additional amount.
4. Pay the balance off early
If your lending institution does not have a prepayment penalty, you may want to pay the balance off before the final due date.
One way to do this is to make higher monthly payments (see #3) until the balance is paid in full. You could also make an early, substantial, lump sum payment. Or you could combine the two: Make higher monthly payments until you have the funds to pay the loan off in full before the final due date.
This will save you money on interest — unless the lender uses a factor rate instead of an interest rate.
5. Refinance the loan
Your purpose in getting a fast loan was to resolve an immediate need. Once that problem is resolved, you could look at replacing that loan with a traditional business loan that carries a lower interest rate. This could make the cost of borrowing the money less expensive and give you a lower monthly payment.
However, before refinancing your loan, you’ll want to factor in the cost of the origination fees. If the amount of money you’ll save with a lower interest rate is offset by the origination fees from a new business loan, it may not make sense to refinance the original loan.
The bottom line
If your business has an urgent financial need, taking out a fast business loan may be the solution. However, since these loans often come from online lenders and carry short terms and high interest rates, it’s important to manage them correctly.
Your keys to success are making on-time payments (preferably automatically), sending more than the minimum payment when possible and paying the balance off early. And, if you see interest rates dropping, you may want to consider refinancing the original loan.