Effective debt management can lead to long-term financial stability and prosperity for a business organization. Practicing responsible debt management could free up funds for the growth and advancement of the organization. However, inefficient debt management can lead to uneven cash flows, a downgraded business credit score, or even financial insolvency.
However, adopting certain strategies can help businesses to smoothly navigate their debt repayments while expanding their operations. Read on to discover practical tips that can help you manage loan obligations, negotiate better terms, and support long-term business growth.
Smart Tips to Manage Business Loan Repayments
Here are 15 practical tips to help manage your business loan repayments more effectively.
1. Understand debt levels for the business
Organizations should consider comprehending and analyzing their financial position and debt levels for effective debt management. For every pending business loan, they should check terms such as loan interest rate, default penalties, repayment schedules, existing principal amount and hidden charges, etc. regularly. In case there are any questions, communicate with the lender seeking clarification beforehand rather than to face bigger issues at the later stage.
2. Aligning Repayment Schedules with Cash Flow
There may be instances where standard EMI schedules might not be accommodating enough for seasonal businesses or organizations functioning under certain industries. Aligning a repayment strategy with cash flows can lead to better loan repayment strategies without missing EMIs.
Businesses struggling with uneven cash flows should seek flexible financing options from their lenders such as higher instalment structures or periodic repayments.
3. Set Up Automated Payments
Setting up automated billing can help to avoid repayment defaults or the penalties levied due to the payment defaults. It can help lenders to safely deduct loan repayments from the business accounts potentially avoiding delays. Minimizing payment delays also helps business organizations to maintain a positive lender borrower relationship.
4. Consider Consolidating Loans
Managing multiple loan repayments at once could be innately frustrating and stressful for businesses. Such organizations should consider consolidating multiple debts into one. It can help them to simplify loan repayments and avail loans at cheaper interest rates. However, before making the decision, ensure that the organization doesn’t end up paying higher interest for consolidated debt.
5. Refinance or Restructure business loan
Businesses facing financial distress owing to higher interest loans or uneven cash flows can opt for loan refinancing or restructuring. It involves taking a new loan to pay off the existing one at a lower rate or at better terms resulting in reduction of financial burden on the enterprise. It is recommended to utilize a business loan payments calculator to determine the manner in which the new terms will affect the repayment schedule.
6. Boost Sales Profitability
Revenue growth is critical for the early settlement of business loans in a faster and effective manner. Identifying a viable business segment and eliminating underperforming goods optimizes returns. Revenue growth offers improved liquidity, which facilitates meeting the requirements of business loans.
7. Managing Cash Flow
Efficiently handling incomes and expenses regularly can help organizations to identify areas for savings and divert them towards pre-payment of business loans. Additionally, business entities could start a separate savings account for the sole purpose of loan repayments by creating an emergency fund. It ensures that the savings aren’t unintentionally used for operating costs.
8. Refrain from Taking Additional Loans
Taking on additional debt will make the entire process of managing business loan installments futile. Businesses with a heavy burden of debt may find it more challenging to oversee debt management for new business loans at higher interest rates. Thus, to avoid the risk of over-leveraging, focus on paying off current debts before availing new loans.
9. Pre-Payments Or Paying more that EMIs
Consider making partial prepayments during availability of any surplus funds. Extra payments towards the principal amount can help to minimize the load on business loans. Seasonal enterprises with fluctuating revenue streams could benefit from committing more funds to loan repayment.
10. Monitor Business Loans through a Loan Calculator
Utilizing a business loan repayment calculator can help to track payment progress helping to make sound business decisions. It gives information about the interest payment commitments and entire payment schedule. Frequent monitoring also enables them to make payment adjustments and expedite loan closure.
11. Maintaining a Contingency Fund
Holding a contingency fund helps eliminate the need for extra borrowing, especially business overdraft facilities. It assures repayments are made timely and consistently even during unexpected financial slumps. Such a proactive measure can avert payment defaults and handle cash flows during financial downturns.
12. Communicate to build a Strong Lender-Borrower Relationship
Creating and sustaining an excellent rapport with lenders might help businesses manage loan payments efficiently. Keep in touch with the lender frequently to acquire strategies to handle loans more effectively. In case the business organization facing difficulty to repay business loans communicate the concerns immediately.
13. Monitor Business Credit Score
A business credit score is a crucial factor which demonstrates creditworthiness and financial responsibility for an organization. It can help to access better loan offers and negotiate favourable lending terms. Keeping a track of credit score can help organizations take immediate action if any discrepancies or errors appear on the report.
14. Professional Support and Documentation
Organizing and keeping necessary paperwork can go a long way for businesses helping them to demonstrate financial discipline. It can help to resolve any grievance related to loan repayments or avail subsequent credit facilities from the lender. If there is still any concern, organizations can approach professionals for efficient debt management.
15. Look for Alternative Financing Options
Businesses undergoing financial troubles can also look for alternative financing options which will help them to bridge cash flow gaps. Innovative financing solutions such as invoice financing, revolving line of credit, crowdfunding, etc. can help to miss repayment deadlines and guarantee seamless operations while handling current debt.
Tips to Manage Business Loan Repayments
Conclusion
Therefore, navigating business loan payments should not be a burden on the business. Adopting specific efficient repayment strategies may help organizations to monitor and maintain their financial health. It can help monitor debt levels, manage payments on schedule, while growing the organization responsibly. Apart from this, they can accomplish their goals by making prudent decisions and exercising budgeting.
FAQs
How to manage loan repayments effectively?
Create a detailed repayment plan, align payments with cash flow, set up automated payments, create a calendar and try to pay more with every EMI. This ensures timely payments while maintaining a healthy repayment schedule.
How to get an SME business loan?
Find lending institutions offering credit facilities as per your business requirements and seek a list of requisite documents for the application process. If the lending institution is content regarding the genuineness of the application, it will communicate regarding the approval and disburse the loan amount to the SME. But it is advised to understand the sanction letter thoroughly before signing the deal.
Is pre-payment allowed in business loans?
Yes, to pre-close a loan, the borrower needs to make a formal request to the concerned lending institution for loan prepayment, and the business may be charged a pre closing fee or penalty that differs from bank to bank. The loan prepayment could be partial or complete.
What if I am unable to pay a business loan?
Missing EMIs can lead to penalties, downgrading of credit scores and increased cost of loan. There are ways to manage delays in EMI payments and you can seek negotiating with your lender, rescheduling or even opting for a loan moratorium.
Are there tools to manage business loans for SME and Business borrowers?
BankKeeping detects various business loan factors that a SME borrower is unaware of, like, excess interest, hidden charges, and inflated LC/BG commissions. Bankkeeping also decodes sanction terms, calculates your real Drawing Power, and simulates your credit rating, enabling you to negotiate smarter and take control of your loans.