It’s good news if your business can qualify for a startup loan. They are excellent ways to increase cash flow and cover the big expenses that might arise as you expand. But before you take on any debt — or even submit an application — know how you will manage your loan and what happens if you cannot repay.
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What happens if you don’t repay a startup loan?
The consequences of default — being unable to pay your loan — can affect both your business and personal finances. Avoiding default is always important but especially critical in the startup phase.
Since startup loans typically require a personal guarantee, your personal credit score will be impacted alongside your business credit. The lender could sue you for your personal assets to cover their losses. And the lender will seize any collateral you put up.
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5 tips for managing a startup business loan
Startup business loans are just like any form of financing. Focus on on-time payments and making paying down your debt as quick and easy as possible.
1. Prioritize loan payments in your budget
Clearing debt should be the priority as you move forward. Shape your budget around the monthly payment for your startup loan. Avoid falling behind, even if it means cutting expenses elsewhere. Ultimately, your loan will build your business credit score and make it easier to borrow more in the future.
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2. Sign up for automatic payments
If you have regular cash flow, automatic payments are one of the best ways to keep on top of a startup loan. Since they are deducted directly from your bank account, you have one less bill to pay manually each month.
You must ensure the payment goes through — but it should still save time overall. And provided you always have enough in your account to cover your loan payment, your business will avoid late payments and fees.
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3. Avoid taking on additional debts
Startup loans can be a valuable cash infusion for new businesses. However, you should never borrow more than your business can reasonably afford to repay. Even small additional debts can strain a startup’s budget, so only take on one debt at a time. A low debt-service coverage ratio as a business will put you in a better position if you need to borrow for expansion or unforeseen costs in the future.
4. Put extra cash toward payments
While funding a new project or hiring a new employee may be necessary for growth, excess revenue may be better spent by paying back your loan. If you see a seasonal increase in revenue, even one or two extra payments can make a big difference in the amount your business pays in interest.
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Use a business loan calculator to determine if this route makes sense. Also, check your loan agreement for prepayment penalties that could make this route cost more than it saves. But for a small business in the startup phase, you should focus on minimizing money spent on debt.
5. Communicate with your lender
Stay in contact with your lender, especially if you are borrowing through your bank. Direct communication is key to working through problems. A lender that knows your business and its operations may be able to restructure your loan or defer payments if you have issues making payments in the future.
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The bottom line
Before taking on any debt, plan how you will repay it and handle contingencies if you run into problems. And if you received a high interest rate as a startup, you may want to consider refinancing as your credit improves and your business expands to lower your monthly costs.
