Whether it’s a novated lease, line of credit, secured and unsecured loan, commercial mortgage loan, or any of the other business loans available to small business owners, staying on top of existing business loans ensures that the cash flow continues flowing.
Maintaining healthy financial affairs is important for any business.
Not properly managing your business’s existing loans can result in unforeseen business debt, which can be costly and problematic. What’s more, business loan delinquency impacts your company’s ability to seek out new loans in the future.
With a little planning, staying on top of your business loans can be a breeze. Below, we look at five ways to manage your business debts effectively to avoid the possibility of defaulting.
1. Choose the right loans for your business
Not being informed of the type of business loans available for your small business can be a costly mistake. If you are an aspiring entrepreneur, you may not know that there are many different types of loans available for your small business.
In fact, let’s look at an example below.
If your business requires a vehicle, rather than taking out a personal loan, consider the benefits of a Commercial Hire Purchase (CHP) or Chattel Mortgage. Both are commercial finance products and are designed primarily for business use.
This provides your business the option of flexible loan repayments, tax deductions, and the potential to set a final balance payment.
While your business can secure a vehicle purchase with a personal car loan, commercial car loans provide cheaper finance options for a small business.
2. Avoid new debt
A sensible approach to debt management is to curb the possibility of incurring more debt. This works on a personal and business level. Having the financial discipline to know when your business is carrying too much debt ensures that you don’t run into trouble with repayments.
Another aspect of having financial discipline is knowing when to consolidate existing business loans. Debt consolidation allows your business to effectively manage its existing loans and consolidate them into one combined loan.
Consolidating existing loans can be done in several ways. One way to do this is to consolidate high-interest rate loans such as a commercial mortgage onto a secured loan. Another is to combine multiple lines of credit to a 0% interest account.
Knowing when to consolidate business debt can result in lower interest rates, better repayment terms, and the opportunity to borrow more working capital.
3. Get help with accounting
Being a business owner does not automatically grant you the abilities of a finance expert.
Having a strong literacy towards managing small business finances comes with education and experience. If you’ve never taken an accounting class, then it’s best to ensure that your finances are managed by accounting software or a bookkeeper.
An accounting system that uses software and a bookkeeper’s services make it easier to manage existing business loans. But even if you have accounting software or an experienced bookkeeping professional helping you out, you can’t just sit back and forget about the matter.
Taking an introductory course to business accounting will allow you to better understand how your business manages its finances. It also enables you to make smart money management decisions when it comes to your company’s existing loans.
4. Be diligent with your payments
Loan repayments are an important aspect of debt management. When your company has existing loans that it manages, utmost care must be taken to avoid falling behind with regards to repayments.
Not paying off your business loans on time, every time, can lead to serious financial trouble.
Falling behind on loan repayments can result in your business defaulting on its existing loans. This results in severe penalties such as late repayment fees, damage to your credit score, and the seizure of business assets.
Defaulting on any business loan makes it more difficult to secure financing in the future.
Each lender has a specific policy associated with late payments. If you feel like your business is in a position that would cause you to miss a payment or two, contact your lender. Most will understand extenuating circumstances and provide a tailored solution to help your business manage its existing loans.
This, of course, should be done before a payment is missed to maintain a healthy relationship between your business and its lenders.
Also Read: Tips To Manage Your Education Loan
5. Make extra principal payments when you can
If your business is like most, it will be subject to seasonality. This means that during busy periods, it will experience spikes in sales and cash flow. When high traffic periods and business spikes occur, consider making extra principal payments onto your existing business loans.
Paying off your business loans early can reduce the amount your company pays in interest and reduce its liability. This frees up more cash flow and allows your business to maintain a positive credit history.
Certain lenders, however, will charge a fee if you pay off your loan earlier than the agreed term, so read up on your loans’ terms and conditions beforehand.
If your lender enforces early repayment feeds, another option is to put the extra cash flow your business earns during its busy period into an emergency fund. This ensures you never miss a payment even when business is tight, avoiding the possibility of defaulting.
Keeping your financial house in order
Every business incurs a loan at one point or another. Regardless of the types of business loan associated with your company, it’s important to manage these effectively. Doing so can net positive results, putting your business in a better position to negotiate more favorable terms for future loans.
Rob Chaloner is the Founder and Managing Director of Stratton, and is passionate about smarter ways to buy and finance cars. With Stratton, he’s working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.