Ways to Repay Your Business Loan Faster
In the fast-paced world of business, securing a business loan to fuel your company’s growth is often a strategic move. Many small businesses require loans which is difficult to obtain, and hence many small business owners neglect the process after taking a loan while signing loan documents. A crucial part of loan disbursement is the repayment of the business loan. Irregular repayment negatively affects your credit score as well as eligibility and ease of getting any future business loans. Hence, it requires focused efforts on managing the monthly cashflows to honor the repayment schedule. We will discuss important points on how to service these business loans efficiently.
Step 1: Document your income, expenses with the purchases and sales. This will give you an understanding of your monthly cashflows and help you plan the repayment amount for the business loans you have taken.
Step 2: Reduce the uncertainty and variability of your income. Identify customers whose payments don’t come within specified time. Create strategies to mitigate them / provide discounts for early payment of the dues.
Step 3: Negotiate terms with your customers and suppliers to match your outflows efficiently.
Step 4: Leverage the accounting software to give you your personal spends and manage the impulse buying behaviour if any.
Step 5: Improve productivity, invest the business loan amount received in growth opportunities that ultimately pay for the business loan EMIs.
Step 6: Maintain good relationship and transparency with your banker to secure whatever support you can get.
Step 7: Keep a portion of money received separately to be used for business loan EMI payments.
Step 8: Don’t get into a debt trap of taking a new loan to service the EMI of your previous loans.
Strategies used by lenders to ensure timely repayment of loans
1. Escrow Account:
Escrow Account is special current account which is under your name but can be operated only when specific defined conditions are met. Lenders usually open such accounts where your EMI amount is held, and the remaining amount is transferred to your business account. There are various combinations of the use of this account which can be negotiated with your lender.
2. Electronic National Automated Clearing House
This is the most used method of recollection by the lenders. An electronic mandate is signed for the automatic debit of a predefined sum from your account to the lender’s recovery account. If your account doesn’t have enough balance, a bounce charge is initiated which reduces your loan eligibility in the future.
Balance between growth and business loan prepayment
Balancing the need for business growth with loan repayment is a delicate act. While growth is essential, managing your finances efficiently is equally critical. Striking the right balance ensures that your business thrives without compromising its financial stability. Careful planning, budgeting, and forecasting can help you achieve this equilibrium. A thumb rule is if your business doesn’t have an opportunity that will earn your more than the interest rate on your business loan, you can consider repayment of your business loan.
Factors to consider while prepaying your business loan and how it affects total interest rate of business loans:
1. Prepayment Penalties:
Prepayment penalties are charges imposed by lenders when a borrower repays the loan amount before the loan’s tenure concludes. These penalties vary between lenders and loans. While making early repayments is generally a prudent financial move, prepayment penalties can affect your decision. It’s crucial to understand the terms and conditions of your loan agreement regarding prepayment to make an informed choice.
2. Commissions Paid to DSA Loan Agents:
The DSA Loan agents work for commission. The commissions paid by you or the lender or both are the upfront cost of the loan. In terms of repayment, this cost as a percentage of total cost of borrowing can become significant.
3. Loan takeover:
You may find lenders that offer a better business loan interest rate than your current business loan. In this case, you should look at the total cost including prepayment cost for older loan and the processing cost of the new business loan with the savings from interest rate. Many business owners have found taking a top-up on the existing business loan or asking for an interest discount is more profitable than taking over the loan.
About Red Fort Capital
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.