You’ve taken out a loan and now it’s time to think about your business loan repayments. What’s your loan amount? How much is your loan costing you? As a busy business owner, it’s easy to get overwhelmed by the details of your financing, but with some guidance it can become easier to manage your loan(s).
In this blog, we’ll go into how business loan repayments work, the differences between payment types, and tips and best practices for managing your business loan payments. We’ll also explore what you should do if you can’t repay your loan, and explain when you should start paying back your loan. (And the advantages of working with an alternative lender.)
How Do Business Loan Repayments Work?
When a business like yours takes out a loan, the lender and borrower agree upon the loan terms, which include the principal amount, interest rate or factor rate, repayment frequency, and loan duration.
These terms determine the total cost of the loan and the repayment schedule. You’re likely going to be looking at either fixed or variable repayment options.
The Difference Between Fixed and Variable Repayments
Fixed repayments refer to a loan structure where the interest rate remains constant throughout the loan term. This means that your daily, weekly or monthly payments stay the same, allowing you to budget more effectively. However, fixed rates might be higher than variable rates at the outset, as lenders account for the potential increase in market interest rates over time.
On the other hand, variable repayments are tied to a loan with a fluctuating interest rate, typically based on a benchmark index or the lender’s standard variable rate. As the market changes, so do your payments.
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Business Loan Repayment Tips & Best Practices
Staying on the ball with your finances can be a challenge, but it doesn’t have to be. Here are some of our top recommendations.
1. Automate Payments
Set up automatic payments from your business account to reduce the risk of missed payments and late fees.
By automating payments, you reduce the risk of error (even just something as simple as the month getting away from you) and consistently maintain a healthy credit score.
Automated payments also help you build better financial forecasting, as regular and timely repayments contribute to a more stable cash flow, promoting long-term business success for your business.
2. Monitor Cash Flow
Keep a close eye on your cash flow to ensure you can cover your loan repayments.
By keeping a close eye on cash inflows and outflows, you can more easily identify financial shortfalls or surpluses. With this information, you’re better equipped to make informed decisions about how to manage your finances.
Proactive cash flow management also helps prevent defaulting on loans, preserving creditworthiness and fostering trust with lenders. Your monitoring efforts empower you to detect emerging financial trends or issues early, giving you the opportunity to implement timely corrective measures and optimize your spending.
3. Maintain a Repayment Reserve
Set aside a buffer of cash specifically for loan repayments, to cover any unexpected dips in revenue or cash flow.
By setting aside funds specifically for your small business loan repayment, you create a safety net that protects your business from unforeseen circumstances, such as economic downturns or unexpected expenses.
Taking this proactive approach helps you stay on track with your payments, proves your fiscal responsibility to lenders, and strengthens your business’s credit profile, putting you in a great position for future financing opportunities.
4. Leverage Tax Deductions
Take advantage of tax deductions related to business loan interest payments to reduce your tax liability.
The most significant deduction is the interest paid on the loan, as it is considered a legitimate business expense. However, the principal portion of the loan repayment is not deductible.
In some cases, you can also deduct expenses related to collateral, like property taxes or insurance premiums on assets used to secure the loan.
5. Keep Accurate Financial Records
Maintain organized and up-to-date financial records to help you track your loan repayments and overall business finances.
Precise records provide a clear understanding of how your business is performing, empowering you to make informed decisions about repayment strategies. Keeping accurate records also helps you stay compliant with tax regulations and loan terms, reducing your risk of penalties.
6. Pay Off High-Interest Loans First
Prioritize paying off loans with higher interest rates to save money in the long run.
High-interest loans can quickly accumulate, leading to larger outstanding balances and increased repayment difficulties. By focusing on these loans first, you’re saving significantly on interest payments.
7. Use a Repayment Calculator
Use an online loan repayment calculator to help you better understand your repayment schedule and the total cost of your loan.
As you’re planning your business loan repayments, having a calculator on hand gives you concrete numbers to work with. We recommend the calculator from NerdWallet—it’s easy to use and has all the information you need about results.
When Do You Start Paying Back a Business Loan?
Imagine, you need to replace a $30,000 piece of equipment so you take out an equipment loan. You received the financing, but you’re stuck wondering when you need to start paying back your business loan. Payments may start as soon as the day after you receive the funds.
Ultimately, check the terms of your loan. Or, if in doubt, call your financial institution to clarify.
If you took out a long-term loan, your payment timeline may look like:
- Small Business Administration (SBA) loan: 6 to 25 years
- Bank loan: 5 to 7 years
- A loan from an alternative lender: Six months
For short-term loans, your payment timeline will look quite different: Short term loans are most often paid back in a few months or up to two years.
What Should You Do If You Can’t Repay Your Business Loan?
Your best option is also the most obvious: communicate with your lender. Explain your financial situation, and provide a timeframe for when you think you can catch up on payments. Building trust through transparency with your lender can pay off—some lenders may be able to help you through a solution.
While your lender may be willing to work with you, if you go too long without repaying your business loan, you run the risk of going into default. If this happens, your lender still needs to collect the money you owe. No matter what kind of loan type you have, going into default can hurt your personal credit score.
By following the best practices shared in this article, you can set yourself up to make your payments on time and stay financially healthy.
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