Business Loan Repayment Planning and Strategies

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Key Takeaway Table

Key Point Description
Focus on Financial Management
To manage your loan repayments effectively, start by having a strong understanding of your loan’s terms and conditions. Prioritise your loan repayments by incorporating it into your business’s budget. If possible, try to create more income streams and focus on increasing sales. Don’t forget to regularly review your plan and adjust based on your business’s circumstances and financial standing. Finally, leverage your savings by making early repayments, but be careful not to deplete your emergency funds.
Use a Debt Snowball or Avalanche Method
You can utilise two popular debt management methods, the Debt Snowball and Debt Avalanche methods. Debt Snowball focuses on paying the smallest debts first regardless of interest rate. Meanwhile, Debt Avalanche focuses on paying debts with the largest interest rate first regardless of loan amount. Debt Snowball is more motivating for borrowers, but Debt Avalanche can save money in the long run.
Know Your Options
Part of effectively managing your loan repayments is knowing what to do in case you can no longer pay. Some options for business owners include loan refinancing, restructuring, debt consolidation, forbearance, and grace periods. If you need assistance, you can always contact loan experts to help you through your options.

Business loans can help small and medium enterprises (SMEs) obtain funds for important expenses. Once a business receives funding, they can start, expand, improve, and run their businesses smoothly. However, paying these loans requires adequate planning and a strategic approach to ensure that the repayments don’t become a huge burden.

If you own a business and are looking to borrow funds, you must carefully plan your repayments. Here are some strategies you can apply:

Focus on Financial Management

Think

Understand Your Loan Terms Fully

While applying for a business loan, make sure that you fully understand the terms, rates, and conditions associated with your loan. Besides knowing the interest rate, know whether your rate is fixed or variable, as this impacts your repayment amount. You should be well informed about frequency of payments (monthly, quarterly, annually, etc.) so you can manage your budget more effectively. Finally, be wary of any penalties, especially for early repayments or any modifications to the loan. If you have a fixed-rate business loan, you may encounter large break fees if you make any modifications to your loan before the fixed-rate period ends.

Prioritize

Prioritise Repayment

Incorporate your loan repayments into your business's budget. When running a business, you’ll be juggling multiple expenses at the same time. Ensure that you faithfully repay your loans to avoid any financial and legal consequences. Whenever possible, pay more than the minimum amount to reduce the principal faster and save on interest.

Cash Flow

Improve Cash Flow

As a business owner, one important goal is to increase revenue and grow. When you have loan repayments to think about, an increased income is one way to effectively repay them. Explore ways to increase your sales or introduce new revenue streams. Identify and cut unnecessary expenses, and manage your inventory effectively.

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Monitor and Adjust Your Plan Regularly

Review your business’s financial performance regularly and adjust your repayment plan as necessary. Stay in communication with your lender and mortgage broker, especially if you foresee difficulties in making payments.

Save Money

Leverage Business Savings

Allocate a portion of your business savings specifically for repaying your loan, but ensure you don't deplete your emergency funds completely.

Use a Debt Snowball or Avalanche Method

Two common debt repayment strategies are the Debt Snowball and Debt Avalanche methods. Let’s say you have 4 business loans:

 

A. $65,000 at 9% interest for 5 years, $1,349 minimum

B. $100,000 at 12% interest for 2 years, $4,707 minimum

C. $150,000 at 6.5% interest for 15 years, $1,306 minimum

D. $ 700,000 at 7% interest for 15 years, $6,291 minimum

 

The two methods will tackle the debts differently:

Debt Snowball Method

The debt snowball method is a strategy where you pay off debts in order of smallest to largest, regardless of interest rate. You start by listing all your debts from smallest to largest and make minimum payments on all your debts except for the smallest one. 

In the example above, you will pay the minimum on debts B, C, and D. For the smallest debt, which is A, you pay as much as possible until it is fully paid off. Once loan A is cleared, you take the amount you were paying on that debt and apply it to the next smallest debt, plus its minimum payment, creating a “snowball” effect. You’ll be paying $6,056 (loan A’s $1,349 plus loan B’s minimum $4,707) on loan B until it’s paid off, then you’ll add $6,056 to loan C, and so on. 

  • Pros: It’s a highly motivational technique since you’re seeing debts paid right away. Research from Harvard Business Review shows that this is the best method for paying credit card debt, so you can definitely apply this method to business loans.
  • Cons: Paying the smallest debt may mean that you’re holding on to debts with higher interest rates for longer. Even though it’s effective in motivating you to repay your debts, it can cost more in the long run.

Debt Avalanche Method

The debt avalanche method focuses on paying loans with the highest interest rates first, regardless of the debt balance. 

Similar to the debt snowball method, you make minimum payments on all of your debts. However, any extra money is put towards the debt with the highest interest rate. In the example above, that’s loan B. 

Once loan B is fully paid off, you move on to the next highest interest rate, applying the total payment amount from the previous debt to it. So you’ll add loan B’s minimum to loan A’s minimum and make $6056 payments on loan A until it’s paid off. You continue on this “avalanche” pattern until you pay off all debts.

  • Pros: Paying off the largest loan with the highest interest rate first will save you money in the long run, provided that you’re not paying break fees to do so. 
 
  • Cons: Completing the first payment, which can be a large amount, requires a lot of motivation on the borrower’s end.

Know Your Options

Part of a robust repayment plan is knowing your options if you anticipate that you cannot successfully pay your loan. Here are some options you can explore in case that happens:

Our Client for Life Approach

At Dark Horse Financial, we guide clients through every step of the loan process. We can help you find the best rates and terms for your needs. Once the agreement is signed, we’ll be with you, helping you navigate loan repayments and assisting you if you need to restructure or refinance your loan. Contact us today to learn more about our services.

High Five

No Security Required:

Ideal for businesses that either do not have assets to offer as security or business owners who choose not to tie up their property.

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