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.
In addition to understanding basic information like your loan terms, it's essential to review whether your loans are secured by business assets or require collateral. This can affect your financial risk if payments are missed. Business owners should also take the time to review the interest rates on their business loans to determine if refinancing is a viable option. Make sure you're familiar with any unique guidelines or criteria tied to each loan, especially if you’re part of a specific loan program. Understanding these factors helps you explore different repayment terms or even seek assistance from financial advisors who can guide you in optimizing your investment and uncovering new options for managing your debt effectively. Proactively gathering all this information sets you up to maximize the benefits of your loans and ensure your financial health as a small business grows.
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 covenants may include maintaining specific financial ratios related to liquidity, profitability, or debt levels. If you fail to comply, the lender could call the loan, demanding full, immediate repayment. In addition to tracking your overall loan balances and payments, pay close attention to the required ratios and metrics tied to your covenants. Calculate them accurately each month or quarter, ensuring they meet the lender’s expectations. If metrics start to lag, you'll be able to address the issue before any covenant breaches occur. Be aware of any origination fees or industry-specific requirements, and make sure to ask questions upfront. Regular reviews can help you adapt to any changes in your business or the industries you operate in, keeping your form and compliance in check. Also, stay informed by visiting relevant websites for updated loan information.
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.
Incorporating loan payments into your budget is crucial to maintaining financial stability. Start by assessing your overall income and setting a fixed amount aside for loan options each month. Entrepreneurs should also consider creating a dedicated account, such as a savings or banking account, to make sure payments are handled consistently. This will help prevent late payments that could negatively impact your credit card or borrower standing. It’s important to review your business’s finance and identify resources or ways to streamline expenses, ensuring that your loan obligations remain a priority. By consistently allocating funds, you’ll minimize the risk of missing payments and improve your overall experience as a responsible borrower. Additionally, understanding the process behind loan management and the reasons for doing so will help business owners build stronger financial habits, supporting long-term growth and stability.
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, such as the APR and factor rate, 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 can stabilize monthly payments. Whether you're refinancing a small business loan or equipment financing, always consider the potential benefits of locking in a lower mortgage rate or adjusting the length of the loan. A well-timed refinance could reduce your financial burden and support your business growth, even if it requires a down payment upfront.
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.
To fully leverage a business line of credit, it’s essential to understand the steps involved in responsible borrowing. Always consult with a financial advisor to ensure your decisions align with long-term business goals. Consider options like invoice factoring or tapping into inventory for short-term cash flow solutions instead of accumulating high interest on credit balances. Eligibility and credit approval for lines of credit may vary based on the size and nature of your business. Whether using secure or unsecured lines, maintaining clear repayment strategies is key to avoiding excessive costs. Entrepreneurs should evaluate their business’s categories of spending, such as payroll or operational expenses, to determine the best use of a credit line. By strategically managing these resources, borrowers can gain the flexibility needed to cover immediate costs without sacrificing long-term financial stability.
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.
When mixing personal and business finances, you risk not only your commercial venture but also your personal mortgages or homeowner security. It's essential to clearly define the term loan or other financial arrangements between your personal assets and your business. Utilize a mortgage calculator to assess potential risks if using personal funds, and ensure your rate and repayment strategies are within a manageable range. Take advantage of insurance and professional advice to safeguard both personal and business interests. Always review your rights as a business owner, especially when personal guarantees are involved, and stay informed of any notice requirements to maintain financial clarity between your two worlds.
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, as they may offer different products and promotions. 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. Additionally, understanding the nuances of interest rates and fees associated with different loan products can significantly impact a business's cash flow management. By leveraging technology, such as financial forecasting tools, entrepreneurs can make informed decisions that suit their unique operational needs and growth ambitions.
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.
To enhance the security of your business’s business bank account and loan payments, it’s critical to establish a robust continuity plan. Consider assigning a member of your team with appropriate services access to manage payments in your absence. Be sure to use tools like password managers to safeguard sensitive data and adjust disclosures accordingly. Additionally, having multiple employees trained to handle financial operations can mitigate the risks of missed payments during unforeseen events. Engage your banker to evaluate the best approach for ensuring that your business lines and other accounts are managed securely and efficiently. While granting temporary access to people you trust, always assess the type of authority given and make necessary changes afterward. This approach allows for business continuity without compromising long-term success. Evaluating and planning for potential cons and risks in advance ensures that your business can withstand disruptions with minimal impact.
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.
To keep your business loans working for you, it's essential to review your business loan status regularly. Check for prepayment penalties or the possibility of reducing your debt by paying off loans early, and analyze whether changes in the application process or origination fees may impact your startup or ongoing business. Regular evaluations help identify areas where adjustments, like refinancing or consolidating debt, could improve your financial outlook. By conducting a thorough analysis of your loan’s number of payments, interest rates, and procedures, you ensure that the loans remain aligned with your business goals. Staying proactive with reviews also helps you adapt to any changes in loan terms or variety of options available to you. Whether you're an entrepreneur or managing a growing business, routine check-ins provide the clarity needed for a more effective debt strategy.
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.