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Staying On Top of the Money You Owe to Keep
Interest Charges and Fees to a Minimum

Starting or expanding a business takes funding — if you can’t come up with the money yourself, you’re going to need to borrow it from somewhere. It’s much better to get a business loan or use a credit card than it is to borrow from family or friends or run your entirecompanyon your overdraft.

When it comes to borrowing money to fund your business, you can use fixed-rate or variable loans, a business credit card, seek investment from others or use another method. We’ve covered using business credit cards here, so we’ll begin by discussing fixed-rate and variable business loans. We’ll explain what they do, give you tips for managing them properly and share advice on maximizing your cash flow to allow faster repayment.

Understanding Loan Agreements

Loans are agreements you or your business have with lenders and other financial institutions. They will lend money to your business, and in return you agree to repay that money over a certain period of time. There are several important factors that go into loans:

Interest rate

Your interest rate is often shown as an “Annual Percentage Rate (APR).” The higher the APR, the more you will pay in interest.

Type of loan

Fixed-rate business loans have their interest rate “fixed” throughout the repayment term, while the APR on variable loans can go up and down, often in line with the base interest rate.

Repayment terms

These terms indicate the length of time over which you’re expected to repay the loan. Repayment terms can vary widely, but they often run for three years (36 months) or five years (60 months). The longer the repayment term, the more you will likely pay in interest overall.

Minimum payment due

This is the amount you’re expected to repay on a monthly basis to stay up-to-date with loan repayments.

Other

There will likely be other terms, conditions and fees for the loan that you'll need to adhere to. For example, many business loan providers charge a “loan origination fee” as a percentage of what you’re borrowing.

Why Business Debt Is Not a Bad Thing

When loans and credit cards are used properly, they can be great for your business. They give you ready access to the finances you need to start or expand, and they can also help solve cash flow issues. Many businesses (large and small) have some sort of debt; managed properly, it never needs to be an issue. It’s when loans and credit cards are mismanaged that they become a significant problem — that’s what you want to avoid.

When Loans Can Damage Your Business

There are a few ways that loans can become a significant problem:

 

  • High APR/interest rates: Business loans with high interest rates will cost much more over the medium- to long-term, and the money you pay in interest cannot be diverted into other opportunities for your business.
  • Long repayment periods: The more time you hold a business loan, the greater the interest charges you’ll need to pay. The difference between a three-year and five-year loan in terms of total amount repayable can be significant.
  • Not being able to make payments: If you haven’t budgeted properly and don’t have enough free cash flow to meet repayments, you can fall back on your commitment. This is often indicative of deeper issues in your business.
  • Attracting late fees and other penalties: If you fail to make repayments, your business loan provider may assign late fees and other penalties. These will often be added to your outstanding debt — not only will you have to pay the fee, you’ll have to pay interest on the fee!
  • Damage to your business credit score: Just like individuals, businesses also have credit scores. Failing to make loan repayments will damage your credit score, making it more difficult to get future financing.

Managing Your Business Loans and Credit Cards:
Reducing Their Overall Cost

If you want to use business loans and credit cards responsibly, there are a few steps you can take.

Understand What You Can Afford to Repay

You should already have a business budget and a forecast of your likely cash flow. Use this information to understand how much you can realistically afford to repay every month, and don’t overstretch your finances.

Size Your Loan and Credit Card Debt Properly

Based on the amount of money you will have for repayments, work out how much you can safely afford to borrow. Go through your business plans for growth and calculate how much that will cost. Use this information to borrow an appropriate amount.

Choose a Competitive Interest Rate/APR

Review different business loan and credit card providers to find a competitive interest rate. APR shouldn’t be your only deciding factor: Look at business loan provider reviews, late fees, other services and anything else you need to get a complete picture.

Review Accounts Payable Regularly

You need a day-to-day understanding of the assets, liabilities and other financial areas of your business. It’s important to know what you owe and to whom, so review your accounts payable every few days.

Choose the Right Repayment Period

If you can, keep your repayment periods as short as possible. The faster you repay a business loan, the less
interest you’ll incur. When it comes to credit cards, pay off outstanding balances as quickly as possible.

Make Timely Payments

Set up regular bank drafts/ACH transactions to stay on top of your payments. Build the repayment dates and amounts into your cash flow and forecasting so you can properly budget.

Make Extra Payments

Choose a loan provider that does not charge penalties for early repayment. Whenever you have extra free cash flow, pay off a little more of your loan or credit card debt using interim payments. In addition to reducing the interest you’ll pay, this can also give you peace of mind.

Tips for Reducing Overall Debt

Pay Off High-Interest Loans First

If you have extra cash in your business and you want to use it to pay off a loan, prioritize those with higher interest rates. This will reduce your overall debt and interest.

Consider a Business Credit Card

Used responsibly, a business credit card can give you flexibility. It might be worth getting a business credit card to use for short-term financing, since otherwise APRs can be very high. We recommend paying off your total balance every month.

Work Out How Much You Will Save Repaying Early

Use a loan calculator to see how much you will reduce your debt with early loan repayments.

Renegotiate Repayment Terms if You’re Having Problems

If you’re running into cash flow issues with loan repayment, talk to your loan provider about changing repayment terms.

An Example of Loan Costs

The following table shows how much you would owe under various circumstances and the impact of repaying early. We’ll assume you’ve taken out a $50,000 loan.

Amount Borrowed: $50,000

Repayment Terms

3 years

5 years

3 years

5 years

Interest Rate/APR

8%

8%

12%

12%

Monthly Repayment

$1,567

$1,014

$1,661

$1,112

Total Interest Paid

$6,405

$10,829

$9,786

$16,733

Total Amount Paid

$56,405

$60,829

$59,786

$66,733

Increase Amount Repaid by 10% a Month

Monthly Repayment

$1,723

$1,115

$1,827

$1,223

Total Interest Paid

$5,748

$9,598

$8,711

$14,610

Total Amount Paid

$55,748

$59,598

$58,711

$64,610

Saving

$657

$1,231

$1,075

$2,123

Increase Amount Repaid by 20% a Month

Monthly Repayment

$1,881

$1,217

$1,993

$1,334

Total Interest Paid

$5,221

$8,626

$7,849

$12,962

Total Amount Paid

$55,221

$58,626

$57,849

$62,962

Saving

$1,185

$2,203

$1,937

$3,771

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