Our Best Tips For Managing Your Business Loans

Taking on debt to start or grow your business can be scary. But with some planning and discipline, you can make sure those business loans work for you instead of against you. According to Fundera, running out of capital is what leads to 29% of small businesses failing. Here are our top tips for managing business loans responsibly, so they provide long-term value rather than becoming a burden.

Know Your Loans Inside and Out

Before doing anything else, you need to fully understand the loans you have. Make a list of all your business loans and gather key details for each one, including the original loan amount, interest rate, monthly payment, total months to pay off, and any fees or penalties. Also, make sure you know the payoff amount - how much it would cost right now to pay the loan off in full. Having all this info in one place rather than scattered across documents will give you a critical snapshot of what you owe, so you can start mapping out a game plan.

Stay on Top of Loan Covenants

Most business loans come with loan covenants - requirements the borrower must meet for the life of the loan. These tend to include things like maintaining certain financial ratios related to liquidity, profitability, or debt levels. If you don't comply with covenants, the lender can call the loan - requiring full, immediate repayment. So, along with monitoring overall loan balances and payments, keep an eye on required ratios and metrics tied to your covenants. Calculate them properly each month or quarter. That way, if metrics start to lag, you quickly identify areas needing attention before triggering any covenant breaches.

Build Payments Into Your Budget

With all the moving parts of running a business, it's easy for loan payments to fall through the cracks. Before that happens, build them directly into your operating budget. Figure out what percent of your revenue goes toward loan payments each month. Then make sure you set aside that money before using cash for other expenses.

Automate Payments When Possible

Manual payments leave more room for human error. Set up automatic withdrawals from your business checking account, so payments happen on time every month without you having to think about it. Just be sure the money is there when automatic payments get processed.

Pay More Than the Minimum

Making on-time payments is crucial for avoiding late fees and other issues. But don't settle for just paying the minimum due each month. Find areas to trim expenses elsewhere, so you can put extra towards loan balances. Even an extra $20 or $50 per month makes a difference in the long term. The faster you pay down principal balances, the less total interest you pay over the loan term.

Refinance When It Makes Sense

If your business grows or your credit score improves, it may be possible to refinance an existing loan at a lower interest rate. Run some calculations to see if refinancing with better terms will save money in interest costs down the road even after paying fees for the new loan. Refinancing is also a chance to switch from variable rate loans to fixed rates, so you stabilize monthly payments.

Use Lines of Credit Strategically

Lines of credit offer flexible borrowing you can draw from as needed up to a set limit. They work differently than term loans and can be used strategically. Make it a rule to only use credit lines for short-term cash flow management. Have a plan for when and how borrowed amounts will be repaid from future cash flow. Don't let credit line balances sit at higher rates for long periods just to preserve company cash reserves.

Explore Federal and State Programs

Don't just turn to banks or online lenders when you need capital. Federal and local governments offer loads of loan, grant, and incentive programs to support small businesses. For example, the SBA has microloans and disaster loans that are more accessible to newer businesses than traditional financing. Look into whether industry-specific, minority-owned, women-owned, or veteran-owned programs apply to you as well.

Keep Personal and Business Finances Separate

Lending for new companies often requires owners to personally guarantee loans. But blurring personal and business finances too much creates liability issues down the road. Have separate credit cards, bank accounts, and accounting for you versus your business. Don't rely on personal assets like your home to fund the business long term. If you need to temporarily invest personal funds, treat it like a loan to the business by documenting terms and repayment plans.

Improve Your Borrowing Profile

The stronger your business credit profile, the better loan terms lenders can offer you. Having a solid profile starts with a responsible repayment history as well as separating and maintaining business versus personal credit. It also helps to have trade credit relationships reported to business credit agencies, like D&B and Experian. Funding from investors also gets documented. All of this builds your profile to set you up for future borrowing needs.

Balance Loans Across Lenders

While it's tempting to keep borrowing needs under one roof, it's smart business to diversify loans across several lenders. Spreading debt obligations protects you if one lender faces issues of their own, forcing them to call loans prematurely or suspend borrowing privileges until problems get resolved. Blending financing from different types of lenders also provides more flexibility. You might use a community bank for real estate and equipment loans while utilizing online lender products for working capital. Just be sure to compare rates and monitor varying payment schedules more closely when balances are split.

Don't Take Out New Debt Lightly

When cash gets tight, it's tempting to take out another loan or max out credit cards to stay afloat. Tread carefully before taking on new debt obligations since it stretches you thinner. Explore alternatives like bringing on investors, getting temporary equity loans from business partners or owners, or aiming for break-even budgets until cash flow improves. Only leverage new long-term loans strategically for assets that will grow your company.

Have Continuity Plans for Payments

Illness, family emergencies, or other disruptions to normal business operations can put loan payments at risk of being late or missed. To minimize this, make sure multiple trusted employees can access loan details and bank accounts with authority to make payments if something happens, and you're unavailable. Share login details securely via password manager apps. Just be sure to rescind account access afterward.

Review Your Loan Status Periodically

Set calendar reminders to review your loan balances and terms every six months. See if any loans can be paid off early or refinanced to save on interest. Make sure auto payments and payment procedures still make sense. It's easy for the “set it and forget it” approach to cost you more over the long term. Periodic check-ins help you stay strategic with an evergreen view of your debt obligations.

Owning business loans is a huge responsibility, but it doesn't have to put undue stress on companies. Following these tips will help you manage borrowing in a way that propels growth through smart leverage rather than creating a debt burden that adds unnecessary stress and cost. Stay disciplined and be proactive about managing terms favorable to your company's needs and cash flow capabilities. With the right foundation, loans do more good than harm, allowing you to scale operations exponentially compared to bootstrap approaches. If you're looking to take out business loans, let our team at Chemung Canal Trust Company help you find the ideal ones for your situation. Call now to get started.