Small business loans help the economy go around. Without them, many small businesses would be unable to form or expand their operations. Many banks are now far more open to lend to smaller companies than they were, let’s say, five years ago.
Before interest rates spike, you may want to take advantage of small business loans and borrow a good amount to ensure you can launch the company or grow your business.
The difficulty is repayment when you’re just starting out. So, what can you do?
Here are five tips for paying back your small business loans:
1. Create a Budget to Keep Track of What You Owe
Like you would in your household when you borrow money from the bank to fund your mortgage or your automobile, it is important for your business to create a budget to keep track of what you owe.
By maintaining a budget, you can determine how much you owe, how much you’re bringing in, and how much you can pay off every 30 days (or whatever the repayment schedule is).
As long as you update it accordingly, your business budget will be a great assistant.
2. Dedicate 1% of Sales to Repayment
An effective repayment method is to dedicate a certain percentage of your sales to repayment.
So, with each sale you make, you can allocate between one percent and five percent to paying back your student loan. If you’re a retail store and some transactions total $5, one percent may not seem like a lot. However, the more sales you make, the more it adds up, and you can repay it a whole lot quicker.
3. Accelerate Collections from Clients
If you specialize in an industry that receives payment months after the work is done, then it can be difficult to have a steady cash flow. Because of this, some companies apply for small business loans rather than applying for one when they’re starting up.
What’s the solution when you already have a loan from the bank?
Tap your clients and ensure that they pay their receipts on time. Even if the bill is not due for another three months, you can launch promotions or provide discounts should they pay you ahead of schedule.
4. Be Aware of Lender’s Late Payment Policies
One of the worst ways to get behind on your small business loans is to be late. Oftentimes, a lot of borrowers are late because they forgot when the payments were due.
As a business, you don’t want any more expenses. Moving forward, you should be aware of the lender’s late payment policies, whether it is the time they are due or how much interest you will be charged.
Once you are aware of the due date, you need to create multiple reminders so that you can avoid these superfluous late fees.
5. Refinance Debt When You Get the Chance
Despite interest rates gradually increasing, Canadian borrowers are still benefiting from historically low rates. The Bank of Canada (BOC) is likely to raise rates 25 basis points every few months or so, but borrowing will still be relatively cheap for another couple of years – unless the BOC pulls the trigger on 50 basis points or even 100 basis points.
That said, when you get the opportunity to refinance your debt in a low rate environment, then you should certainly do it. You want to lock in low rates for as long as possible. Remember, any time there is a chance to keep your payments low, then do it!
In the fallout of the Great Recession, financial institutions were petrified to lend to small businesses, fearful that they will be insolvent or unable to make payments. They mostly lent to corporations or more established companies.
In recent years, banks have done a commendable job in extending financial assistance to the small businesses community. If you are a startup or a small business that wants to take advantage of low rates and use small business loans, then one of the biggest things to concentrate on is repayment. As long as you maintain a budget and keep track of these repayments, the loan may have been one of the best corporate decisions you’ve made.