A loan process is as important as the repayment procedure. Loan repayment is a vital determinant of your business credit score. Loan repayment refers to the act of refunding a loan based on the agreed terms and conditions.
Any business that defaults at loan repayment is liable to a decreasing credit score. When you take a business loan without a repayment plan, you risk falling into loan delinquency.
The importance of Loan Repayment
Timely loan repayment increases your business’s credit score and trust level with your lender. It should be taken seriously because it reduces your loan interest and obligation and increases your chances of future loans.
A favourable credit history indicates the ability to handle finances and credit issues efficiently. Failure to finance your loans and debts reflects a bad credit score on your credit report, leading to challenges in future loan approvals. Therefore, it pays to clear outstanding loans to avoid issues and penalties.
A quote by Dan Ariely says, “What people do is they pay the small loans first. Why? Because they enjoy making the number of loans smaller. But of course, it is a very ineffective way to pay the debt down.” This has proven true for many small businesses. Some incur different loans for various purposes and think the best approach for repayment is to offset the smaller loans before the larger loans. Paying the larger chucks becomes burdensome because of poor loan repayment plans. The following are some essential things to consider before taking any action for loan repayment.
Your Business Finances
Every business owner secures a loan to expand their business, fund a project, and for many other reasons. After incurring a loan, close monitoring of the business running should be done to consolidate the loan incurred. Business management and practices such as keeping records and checking the business performance should be maintained till it is time to repay the loan. This will help to track the expenses, profits and management of the business.
Also, suppose the business has intangible assets that are not in use, to avoid depreciation, these could be sold to increase income for the company — every kobo counts in a business loan repayment.
Avoid Impulse Spending
It can be hard to control your spending, especially when a good deal appears for your business just after securing a loan. Take, for instance, a 50% off a machine that will increase the sales for your business. But, of course, impulse buying isn’t always wrong. Your business might need that in-demand product, but it could wait until you have fulfilled your loan. Focusing on the purpose you took a loan should be your utmost priority.
Weigh your options
When it is time to pay back the loan, weighing your options involves if the business will have enough assets (other than cash) and liquidity to fulfil the loan requirement. That involves taking into account the following:
- Checking what is left over after covering other expenses like payroll costs, overhead costs, and taxes
- The amount of money available for repayment (the loan amount)
- Your current income and expenses (your monthly budget)
- The duration left on loan before its due date
Review the terms and Conditions
Every loan has its terms, agreement and conditions well-stated before being disbursed. It is important to review it and take it into consideration when making your repayment plan. If you happen not to be able to meet the requirement, negotiate and work out a realistic plan with your lender. Effective communication is a good way to build a long-standing relationship with your lender.
The key to avoiding loan delinquency for your business is having a plan right from the moment before you apply for the loan. This will help you in considering your business state and the opportunities you can maximise from the loan, which will help you come up with a repayment plan that works for your business. Remember, BizNurture offers not only small loans to microenterprises, SMEs, and groups but also provides other financial services like savings, insurance, and investment advice. Visit our website to know more.