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.
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:
Your interest rate is often shown as an “Annual Percentage Rate (APR).” The higher the APR, the more you will pay in interest.
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.
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.
This is the amount you’re expected to repay on a monthly basis to stay up-to-date with loan repayments.
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.
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.
There are a few ways that loans can become a significant problem:
If you want to use business loans and credit cards responsibly, there are a few steps you can take.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Use a loan calculator to see how much you will reduce your debt with early loan repayments.
If you’re running into cash flow issues with loan repayment, talk to your loan provider about changing repayment terms.
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
Business credit cards can offer small businesses a lot of benefits, including a way to separate spending, manage cash flow, and earn rewards. Citibank offers several credit card options for small businesses. Read reviews to choose the right one for you.
By Jennifer SokolowskyKey Bank is an award-winning bank with a history that spans nearly two centuries, and if you’re looking for a reputable bank for your small business, Key Bank might be a good option. It’s one of the country’s largest bank-based financial service companies, and it’s still growing. Headquartered in Cleveland, Ohio, Key Bank is a […]
By Heather Hafer“EBITDA” is an abbreviation for “earnings before interest, taxes, depreciation and amortization;” every business owner should be aware of this approach and how to calculate EBITDA.
By Robert Yaniz Jr.The Federal Reserve recently published a report about small business lending: Browsing to Borrow: “Mom & Pop” Small Business Perspectives on Online LendersBrowsing to Borrow: “Mom & Pop” Small Business Perspectives on Online Lenders. This lending publication examines perceptions of a select group of small business owners about online lenders, as well as their understanding […]
By Chris Keller