Managing a Business Loan after Approval
With so much of your energy focused on getting approved for a business loan, you probably haven’t thought much about how to manage the loan after approval. Whichever dreams it will make possible – whether it’s expanding to a new location or investing in new equipment – could disappear if you mismanage the loan’s funds.
Once you have been approved for a business loan it is crucial that you learn how to manage those funds properly.
Track your Spending
When you applied for a business loan, you had a plan for that money. That plan might have been a detailed, 20-page document, or it might have been the simple intention to buy inventory for the holiday season. In the loan application process you likely refined that plan, put together a rough budget for the funds, and mapped out where the new capital would be spent. Now that that loan has been disbursed and the money is in your account, you will need to make sure you follow that plan.
One of the easiest methods to track how you are spending your loan is to avoid co-mingling funds. Do not put the capital in your business checking account where money from normal operations flows in and out. Instead, open a separate checking account solely for the project that the loan is intended to fund. If it was a store remodel, for example, pay the painters and workmen from that account. This facilitates monitoring the project’s total costs, as well.
If you do not want the hassle of maintaining separate business accounts, at a minimum avoid co-mingling personal and business finances. It can be far too easy to be short of personal funds and pay your mortgage or car payment with money intended to fund a business project. As well, spending the funds on smaller business expenses which could have been funded from operations fritters it away.
Remember that those funds in your account have a cost to you. You paid fees and will be paying interest on the capital you have borrowed, likely because the returns you will eventually receive from your business’ plans are higher than the cost of capital. That differential will shrink if the money is not used to grow your business.
Track your Current Balance
Staying on top of your loan’s current balance is important. Set up a spreadsheet with the initial disbursement and payment schedule laid out in an easy to follow format. Your monthly statements will present the breakout of your payment between loan principal and interest. Each month, deduct the principal paid down from the total loan balance. Keeping track of what you’ve paid in interest, too, can keep you focused on your business’ plans and less tempted to spend the money elsewhere.
Knowing your current balance helps with tracking your project costs. If you are starting to go over budget, you can look ahead and anticipate future cash flow needs. That spreadsheet also serves as a reminder of when payments are due.
A small business owner cannot afford a missed or late payment. Late fees add up quickly, and some lenders charge daily interest and fees on past due balances. Plus, they could report a missed or late payment to a credit bureau. If you are in the process of repairing or raising your credit score, a missed payment can undo all your hard work.
Many alternative lenders will only accept payment through automatic withdrawals from your business checking account. It saves them money and time in processing and lowers their risk of non-payment. If your lender does not mention or insist upon it, ask if you can set it up anyway. Traditional lenders often shave a half point off your interest rate if you’ve signed up for automatic withdrawals.
The issue, of course, is that there has to be money in the account to cover payments. Sign up for texts messages if your balance falls below a minimum. Link a checking account to a savings account, credit card, or line of credit, so that if an auto payment goes through and you don’t have the money in your checking account to cover it, the funds will be pulled from linked accounts. Or set aside a portion of the loan’s funds in a different account solely intended for repayment and have the payments taken from it.
Do not hide from your Lender
Despite your best intentions, you might run into difficulties repaying your business funding. Do not hide from your debt. Avoiding phone calls, tossing letters in the trash, and not talking to your lender raises their concern. Their insistence on contacting you will grow stronger, and their willingness to work with you will shrink if you are not communicating.
Be upfront with a lender if your business plan has gone off-track. Talk to them about working it out, whether it is waiving a late fee or setting up a loan deferral. You do have options, but if you hide from your lenders by the time they reach you some of those options may no longer be on the table.
Avoid New Debt
When one loan becomes too much, or your plans are not succeeding, it can be tempting to run out and obtain another loan. While there are times when using one loan to pay off another is wise, for example, to lower the interest rate, beware of robbing Peter to pay Paul. Running around town and essentially transferring debt from lines of credit to credit cards to small business loans will eventually catch up with you.
If you have over-borrowed and your business is too highly leveraged the whole thing could collapse. Cut back on expenses, or scale back your plans, if the capital you borrowed is not going as far as you thought it would. Invest more personal funds into the business. But talk to a financial advisor before taking on more debt.
But Consider Paying off Old Debt
Businesses often have more than one type of debt outstanding. In fact, your purpose in obtaining new capital might have been to pay off higher interest debt. If that was the case, do not become distracted by all the other business opportunities for which you could use the funds.
Loans have a cost to you. Interest rates rise and fall; closely associated with the Fed Funds lending rate. Taking out a lower interest loan to pay off an older, much higher-interest loan can help your business. You will save on interest, yes, but your monthly payment will also likely be lower. This frees up cash flow that you can reinvest in your business.
Pay Back the Loan Early
Sometimes, however, the results exceed expectations, and your business’ revenues have grown! There are distinct advantages to paying back a loan early. If the loan did not contain a prepayment penalty, you can save on interest. Some loans have early payback discounts, too. If your loan payments include payment processing and servicing fees you will save on those fees once you no longer have to make regular payments.
Even if you can’t pay back the entire loan balance early, pay more when you can. Reducing the principal amount reduces the amount of interest charged.
Business owners rarely go into business because they have a passion for accounting. But neglecting to stay on top of your business’ revenues, expenses, and net cash flows can put you out of business even if sales are high. Set a time weekly to sit down and go over your books, and include reviewing your small business loan during that time. Once you have successfully managed and repaid one business loan your credit score will rise, your access to capital will improve, and your terms and rates will be better. It is always in your best long-term interest to be a good borrower.