It’s common knowledge that paying a loan back on time is a good thing to do; this is true whether it’s a personal loan or a business loan.
This article explores ways to pay back your small business loan and the benefits of doing so.
Things to consider before you borrow
When you take out a small business loan it is implied that your business is in a financially stable position and you intend to use a cash-injection to help grow your business or alleviate short-term cash flow issues. You will always be asked to demonstrate your business's ability to make money.
Sticking to your business plan is a reliable way to pay back your loan quickly; in it you will have outlined a strategy for growing your business, and this will have been seen and trusted by the lender.
Reviewing the effectiveness of your investments along the way is a good idea, too. Ensure the graphs are moving in the right direction and money is flowing into the business from the directions you expected. If things aren’t going to plan, put things in place to correct this as quickly as possible to reduce the risk of missing any payments.
Benefits of paying back your small business loan quickly
Paying back a loan on time has multiple benefits; it keeps your credit rating positive and ensures a positive relationship with your lender, both of which will put you in a stronger position if you need to borrow again in the future.
If you have a secured loan, paying back quickly and on time protects your collateral from being repossessed. Lenders may repossess collateral to recoup their losses if loan payments are missed, or if the loan is defaulted on completely. Collateral can be assets like premises, vehicles, equipment, inventory and more, so it’s highly important these are protected in order for your business to continue to function.
It also puts you in a position to reinvest earnings into the business once the loan is repaid. A shorter repayment term means you will be obliged to make loan repayments for a smaller amount of time, giving you fewer outgoing payments to consider on your business’ accounts.
If you are able to repay your loan quickly, you will benefit from a shorter repayment term and lower interest rates.
If you are in the position to make early repayments you may be able to reduce the term and interest further, but there are considerations:
- Ensure your lender does not charge early repayment fees
- If they do, assess whether the fee(s) offset what you’ll save on interest
How to tell if it’s worth paying back early
As a simplified indication, if the number you get when you subtract the savings on interest from any early repayment fees is positive, paying back early may be worthwhile. If the number is negative, it probably isn’t.
Remember that paying back early, if it is possible, will reduce the amount of liquidity in your business (the amount of cash readily available). It can be tempting to settle debts as quickly as possible, but this should not be done at the expense of your business being able to function. If you make early repayments and are then forced to take out another loan later on, the decision may have been counterproductive.
As always, if you have questions about how to pay back your small business loan, get in touch and we’ll be happy to answer.