You did the work to take your business to the next level and applied for a business loan. Then you got approved. So, now what? Once you get a business loan and funds are disbursed, you should have a plan to manage loan payments.
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Staying on top of managing loans is key because you don’t want to end up with a delinquent loan. As of Q3 2022, 1.11 percent of all business loans were delinquent, according to the St. Louis Fed. To avoid delinquency, you’ll need to know how to pay the loan and what to do if you have trouble with payments.
6 tips for managing a business loan
Getting a business loan is exciting, but managing loans can feel intimidating. However, managing a loan well doesn’t have to be scary. Use these tips to make a plan for taking care of your business loan.
1. Prioritize payments in your budget
When you sign a loan agreement, take note of the monthly payment amount. Make a plan for setting this money aside, and prioritize this in your budget above less-important expenses.
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Things like optional perks for employees, flashy new equipment or employee overtime don’t make sense if you can’t make your loan payment.
Miss enough payments on your loan, and you may end up with a loan in delinquency. When you have a delinquent loan, the lender may seize any loan collateral or sue you for the remaining loan amount along with interest, fees and penalties. The lender can also send the loan to collections, dinging your credit history.
Having trouble making space in your budget for loan payments? You may want to chat with an experienced business accountant. They can help you see things in your business accounts that you might be missing.
2. Adjust your plan based on your performance
A budget is a calculated plan for how you hope your income and expenses go each month. However, some months bring slowed revenue or unexpected expenses. In other months, you bring in much more than planned.
Looking at your monthly recorded revenue and expenses is important for managing your loan. If you have a slow month, you may need to eliminate certain expenses temporarily to make your loan payment. If you make extra income another month, think about applying extra money to your loan payment or set aside money for loan payments in months when business is slower.
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Adjusting your financial plan according to your monthly actuals proves especially important for business lines of credit. You need to pay back what you spend to be able to continue using your credit line. Make sure your cycle of draws and repayments from the account remains even overall throughout the draw period, so you don’t end up using up your entire credit line without the ability to repay it.
3. Track your spending
Every business needs a solid bookkeeping system to keep track of spending. This allows you to see where your money is going and to evaluate when you need to cut certain expenses. Thorough bookkeeping also helps keep your loan funds separate from other business or personal finances.
You want to be able to hold enough money in your accounts to make your monthly loan payments, and you don’t want to mix up spending categories or misuse loan funds. If this is your first time managing business funds, here are a few things to try:
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- Open separate business accounts. Keep your business expenses separate by having dedicated business checking and savings accounts.
- Use a spreadsheet or accounting software. A dedicated system for keeping track of your business spending keeps everything organized. For a simple, free system, track everything on a spreadsheet. Divide your debits and credits into categories. For a less-DIY solution, look into using a bookkeeping service or software.
- Keep track of your receipts. Receipts give a record of where and when you spent money. They help you categorize spending and give proof of spending when it’s time to file your business taxes. They can also help you catch errors in your records.
- Review everything regularly. Whether you have an automated system or not, it’s a good idea to check your spending regularly. You can evaluate if you are spending too much or need to make adjustments.
- Work with an accountant. If you struggle to manage your business spending, consider working with an accountant. They can help you manage all your spending and give tips for allocating your financial resources effectively.
- Over time, your record-keeping will help you get a sense of your typical cash flow across months and seasons. You can use that information to adjust your repayment strategy. If, for example, you’re often flush with cash mid-month, that might be the best time to send in your loan payment.
4. Make extra payments, if possible
When you have extra resources in your business, think about putting more money towards your loan than the minimum each month. Paying extra saves you interest over time and allows you to pay off the loan early.
Use a loan payoff calculator to see how much extra payments could save you. Let’s say you have a $50,000 loan with a 10-year repayment period and an APR of 6 percent. With no extra payments, you will pay around $16,610 in interest over the life of the loan. However, if you pay an extra $100 each month, you reduce your total interest to about $13,130, saving you around $3,500.
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5. Communicate with your lender
Life happens, and businesses sometimes hit hard times. You may find yourself unable to make your loan payments. If this happens, make sure you talk to your lender as soon as possible. It may be possible to work out a different payment plan or find a way to stretch payment periods until you have more cash.
Ignoring your lender may only make things worse, but many lending partners are willing to help you if you face difficulties.
6. Refinance if appropriate
Refinancing your business loan can allow you to take advantage of changing circumstances and save money on your loan. Refinancing may make sense if better interest rates are available or if you have significantly improved your credit since applying for the loan.
However, refinancing doesn’t always make sense. You often have to pay loan fees when you refinance and open a new loan and these can cancel out any savings you may get with a lower interest rate. If you are considering refinancing, calculate every cost to determine if it’s the best decision for your business.
The bottom line
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Taking out a loan for your business is a big responsibility, but it’s possible to manage loans well. Keep track of your finances and make timely payments to stay on top of your loan payments. If you are having trouble paying a loan, speak to a financial professional like an accountant or financial advisor to help you tackle your payments. And if industry interest rates drop, consider refinancing.
