There are many advantages to paying off a small business loan faster than your repayment schedule. Accelerating your repayment period will save you interest in the long run. Paying down the loan could improve your credit score if your debt ratio is too high. It can also free up working capital to invest in your business elsewhere, particularly if high payments are hurting your ability to run your business.
But, as many reasons as there are to pay down debt, it’s easier said than done. Without a plan and without putting that plan into action, repaying a business loan faster will just remain a dream. Follow these steps to successfully pay down your debt faster.
Before you can make plans to send extra money to a loan you need to know where your money is currently being spent. If you do not currently have a budget, open up Excel and set one up. A simple budget compares cash inflows with cash outflows. If your business is doing well, you will have a net positive at the month’s end. That is your free cashflow, money which you can use to pay down debt faster.
Even if you do have a budget, how closely are you following it? Print out your last three month’s bank statements, add up your spending, and compare it to your budget. You might be surprised to find that spending in one area has gotten out of hand, or that you don’t need to budget as much for a line item.
Analyzing your current spending will help you identify areas where you could trim expenses or redirect money to paying down your small business loan.
It helps to see it all in black and white. When you first applied for your business funding, you should have created a debt payment spreadsheet which laid out monthly payments, the amount of each payment going to interest and the amount going to principal, and how long you would be repaying the loan. If you did not, and you are now considering paying down the loan early, now is the time to do it.
Take a look at that spreadsheet and play with the numbers. If you add an extra two hundred dollars a month to your payment, how much faster will the loan be paid off? How much interest will you save?
There are two common strategies to paying down debt. One is to cut your spending to just the essentials. Determine the smallest amount that it will take to run your business, spend only that amount, and put the rest of your revenues towards your debt.
Alternately, you can decide upon a percentage strategy. Figure out what percent of your profit you would like to dedicate towards debt repayment. This strategy works well if you are still attempting to make capital investments and grow your business because profit can be used for both debt repayment and growth investments.
Decide upon your repayment goal, keeping in mind that it should be realistic and achievable within the context of your business’s ongoing operations. Keep in mind that, as much as you may want to be debt-free, you should not harm your ability to stay in business by rushing to pay off debt sooner.
Lenders prefer that you make payments by setting up auto-deductions from a bank account. It reduces the processing fees for them and improves their likelihood of being repaid. While some lenders will require payment through automatic withdrawals, others will incentivize you to set them up by offering a small reduction in the interest rate.
Even though that incentive can only be a quarter to a half point of interest, the savings will add up over time. Plus, auto-payments ensure that you will not ever forget your loan payment and you will save money on potential late fees.
Consolidating existing debt is an excellent way to save on interest payments over time and pay down the total debt faster. Small business owners often seek out alternative lenders like Shield Funding for this purpose.
Debt consolidation pays off all your existing loans and credit cards and lumps them together in one new consolidated business loan. A lower blended interest rate overall will save you money. Making one payment, instead of many, saves interest and fees. Plus, it lessens the chance that you will forget to make one of your payments some month.
After setting up automatic payments, look back at your debt payment plan and budget. If your business follows a seasonal pattern, plan on making an extra loan payment during the months when cash inflows are high. If you identified that you have a hundred dollars of free cash flow every month, plan on sending that extra money to your business loan.
Sending as little as an extra fifty dollars per month can make a big difference in the amount of interest you pay over the loan’s life. Use an online calculator to determine how much money you would save. Making extra payments, particularly if you can designate them to be applied to principal, reduces the loan’s total principal. Interest is calculated off that principal, so with every extra payment you make your next monthly payment will go be slightly lower.
You can also divide up your extra payment. If you want to make one extra payment a year, divide the amount of your fixed monthly payment by 12. A monthly payment of $240 is just an extra $20 a month. Add that little bit extra onto your monthly payment and, by the end of the year, you will have made a whole extra payment.
Not everyone is good at setting aside a little extra every month. Some people struggle with spending every penny in their bank account. If that is you, make a plan to save in spite of yourself. There are multiple apps which round up the change on debit and credit card transactions and roll it into a savings account.
If you spend $15.25 on office supplies, the app or your bank will round the transaction up to $16 and put $0.75 in a linked savings account. Bank of America calls their program “Keep the Change,” and many other banks have similar programs. Some of the apps available are BoostUp or Qoins.
While saving an extra $0.75 to $1.00 a day may not seem like much, it will add up over time. Think of these apps as the digital equivalent of a change jar.
Look around your business’s storage room or warehouse, print out an inventory list and take stock, or honestly evaluate how much use your business is getting out of its capital assets. Perhaps you do not really need two large printing presses to handle your order volume. Or some of your inventory has been sitting on your shelves for years.
Consider what you can liquidate and look into selling it. Obviously, do not harm your business’ ability to grow and existing revenue streams. It is important to be realistic, even if it means selling inventory at a loss. After a point, it is costing you money to keep it around.
Once you have liquidated unused assets and inventory, put the money you receive towards paying down the principal on your loan.
In some rare instances your lender might be willing to renegotiate your loan’s terms. Extending the repayment period would lower your monthly payments, and they are more likely to approve a longer term than an interest rate reduction. Be prepared to make a business case as to why the lender should negotiate with you.
Perhaps a lower payment would free up working capital for an opportunity that could, ultimately, lead to a faster repayment or to the lender recouping their money faster. While it is worth a try, debt consolidation is more common than renegotiating the terms of an existing loan.
These strategies will help you pay down debt faster, but they require discipline and planning. Always check with your lender to ensure to ensure that your loan has no prepayment penalties, or you could lose any benefit received from paying down debt early. Lastly, evaluate all areas where you could direct your excess capital for their risks and rewards when making a debt repayment plan.
