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A business loan is beneficial to every company of all sizes and industries. It increases the company’s working capital, allowing it to maintain operating cash flow and cover any short-term operational needs and unexpected expenses without sacrificing emergency funds.
However, a business loan is another financial responsibility. For many businesses with unstable revenue, taking it out and paying it off can be a burden. Thankfully, there are ways to avoid getting pressured by it.
Here are five ways to manage a business loan:
Prioritize Loan Payments
A business budget is critical in every company’s financial management. It enables business owners to oversee and better understand cash flow and make more informed financial decisions, making it an essential pillar of a company’s success and security.
If the company has an existing business loan, prioritize its monthly loan payments in the business’s budget. It should be above less important expenses, such as optional business travel, new equipment, and investments.
Otherwise, the company will likely end up with a loan in delinquency. In this case, both business and personal credit may be damaged. In the worst case scenario, the lender will legally seize any asset or collateral secured against the loan, or worse, sue the business owner for the outstanding loan amount along with interest, fees, and penalties.
Budget Based on Actual Revenue
One of the important factors in managing a business loan is running a cash flow forecast. It tracks the expected cash movements, including income and outgoings, over some time in the future.
A cash flow forecast helps anticipate cash flow shortages. If they’re detected early, companies can take measures, such as taking out loans or postponing investments, to mitigate the effects of these bottlenecks, preventing insolvency.
Running a cash flow forecast is especially crucial for seasonal companies. The revenue and expenses of these businesses aren’t always constant and, sometimes, unpredictable. In this case, running a cash flow analysis and budgeting based on monthly actuals is necessary.
For example, a seasonal company usually has slowed revenue during the off-season. Business owners must analyze cash flow to determine which spending can be temporarily eliminated. If the slow season persists, extra revenue might be needed to repay the business loan. If there are remaining funds, set them aside for future loan payments.
Adjusting the business’s budget based on monthly actuals is also especially crucial for business lines of credit. For the company or business owner to continue using a credit line, they must pay back what they spend. Lastly, throughout the draw period, keep the account’s cycle of draws and repayments “even” to prevent using the entire credit line without being able to repay it.
Make Extra Payments (If Possible)
As mentioned, consider putting more money toward the business loan than the minimum each month if the company has extra revenue. Doing so shortens the loan period (meaning finishing it earlier) and reduces its interest over time.
Let’s say a North Carolina-based company took online loans nc out. The business owner decided to consolidate these loans and now has a $50,000 loan at 6%, payable within ten years.
If the owner pays an extra $100 monthly, the total interest will be reduced to around $13,130, saving the company around $3,500. However, if the business owner won’t make extra payments, the company has to pay about $16,610 in interest over the life of the loan.
Track Spendings
Always keep loan funds separated from both personal and business finances. Avoid misusing loan funds and mixing up spending categories as well. To ensure all of these are followed, thorough bookkeeping is a must.
For beginners, here are some fool-proof ways to effectively manage a business loan along with regular funds:
- Open separate business and savings accounts.
- Keep receipts. They’re helpful when categorizing spending, proving expenses when reviewing business expenses or filing taxes, and catching errors in both company and personal records.
- Use a spreadsheet (for a simple, free system) or accounting or tracking software (for a less do-it-yourself solution) to keep everything organized.
- Work with an accountant, especially when struggling to manage business spending and budget effectively.
This record-keeping won’t only help understand the company’s cash flow across months and seasons. It can also help adjust loan repayment strategies. For example, if the company often flushes with cash mid-month, it could be the best time to pay the loan.
Refinance (If Appropriate)
Besides making early payments, refinancing the company’s business loan is another way to save money. However, it’ll only make sense if the owner or company’s credit has significantly improved since the loan application or if better interest rates are available. If planning to refinance, calculate every cost to ensure it’s the best for the company.
Final Thoughts
In summary, remember the “4 A’s” when managing a business loan. “Analyze” the company’s business budget and “adjust” it based on monthly actuals and expenses. Then, “apply” extra revenue for an early loan payoff. More importantly, “ask” an experienced business accountant, especially if managing debt and restructuring business finances is hard.
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