Whether you want to expand your business or manage overhead costs, availing a business loan can help streamline your cash flow requirements. While business loans remain the backbone of the enterprise landscape, effectively managing this debt is also crucial. Business loans with high EMIs can compromise the financial stability of your business, result in capital deficits, and impact day-to-day operations. Therefore, it’s crucial to draft a comprehensive business loan repayment plan before you apply for one. Having a well-structured business loan repayment plan helps optimise interest expenses, maintains the financial health of your enterprise, and strengthens your relationship with the lender, simplifying access to future funding opportunities. This business loan repayment guide outlines how you can streamline loan repayments to fulfil your debt obligations without overburdening your financial ledger.
What is Business Loan Repayment?
Business loan repayment refers to returning the borrowed funds to the lender within the agreed-upon timeframe. When you take a business loan, the lender sanctions the principal loan amount against a certain rate of interest. As the borrower, you must repay this principal amount, along with the accrued interest within the selected loan tenure. The repayment tenure varies depending on the lender selected and the type of business loan availed. In a nutshell, business loan repayment encompasses the repayment of the principal sum, along with the applicable interest. Timely loan repayments are crucial since they reflect on your creditworthiness as a borrower making it easier to secure lines of credits in the future. Conversely, missed or delayed loan repayments can also result in penalties and a negative impact on your credit score. Therefore, it is important to communicate with your lender and finalise a loan repayment plan that suits your monthly cash flow and does not create a financial burden.
Tips to Repay Your Loan Faster
Here’s a list of ways you can simplify and streamline your business loan repayment and reduce your loan burden:
1. Make Partial Payments
You can make partial prepayments on your business loan if you have access to some extra cash and wish to be debt-free sooner. Partial payments help pay-off the loan faster and reduce your overall interest burden. However, most lenders charge a partial payment fee that can range up to 4% of the pre-payment amount. Apart from penalty charges, some lenders also place a cap on the number of partial payments you can make towards a business loan in a given financial year. Therefore, it is important to review your lender’s partial payment policies before implementing this strategy.
2. Increase your EMI Percentage
Increasing your EMI percentage is a simple, yet effective strategy of repaying business loans faster. If you believe you can cut-back on operational expenses or boost sales to increase revenue, you can approach your lender to raise EMI payments by a certain percentage. You can also opt for higher EMI payments during busy seasons when the cash inflow of your business rises. In such instances, you can consider allocating surplus funds towards the loan repayment goal. Increasing your EMI payment reduces the outstanding principal amount, helping you repay the loan faster as well as lower the interest component of the loan.
3. Refinancing your Business Loan
Implementing the refinancing strategy does not help clear the loan faster, but it helps restructure the debt in a favourable way. A refinancing is a way of replacing an old loan with a new one with better terms, like lower interest rates or a different repayment tenure. You can try refinancing with the same lender on better terms or approach a new lender. However, before you refinance your loan, ensure the interest rate you get offsets the prepayment penalty imposed on early payment by most lenders. In some cases, this penalty may be higher than the overall refinancing benefits.
4. Opt for Shorter Repayment Term Loans
While longer loan repayment tenures offer payment flexibility, shorter tenures aid in faster repayment. Shorter tenures speed-up the repayment process and free-up funds which can be used for other purposes. Moreover, term loans with shorter tenures typically incur lower overall interest compared to loans with longer tenures. However, ensure that opting for a shorter tenure does not compromise your liquidity.
5. Maintain a Positive Working Relationship with the Lender
Maintaining a positive working relationship with the lender can go a long way in streamlining business loan repayment management. Timely and EMI payments fosters a positive relationship with the lender, establishing your credibility as a trust-worthy borrower. Similarly, open and regular communication with the lender helps address potential issues early, negotiate favourable loan terms, and ensure future support.
How Does Business Loan Repayment Work?
Generally, business loan repayments start a month after the loan disbursement. However, this may vary depending on the lender, loan type, and loan structure in question. Lenders offer multiple business loan repayment options to borrowers to help you tailor the repayment structure according to your requirements. Some common business loan repayment options offered include:
- EMI Payments: If you opt for the EMI payment option, you have to make a series of planned monthly instalments over a fixed tenure. In other words, you must pay a fixed instalment on a preset date every month until the business loan is repaid in full. A part of the principal sum and interest amount is included in the EMI amount. Most business owners prefer the EMI payment option since it helps them clear the outstanding debt in manageable instalments without feeling financially overwhelmed.
- Bullet Payments: If you opt for the bullet payment option, you simply need to pay the interest accumulated on the loan during the loan’s tenure. The principal amount due must be repaid as a lump-sum at the end of the loan’s tenure. Loans that offer bullet payment facilities are offered for a fixed term of 5 years and are commonly known as interest-only loans. The bullet payment method is ideal for borrowers who are looking to reduce their repayment burden during the tenure. If you are expecting a client to clear accounts receivable soon or some predictable increase in cash flow, you can opt for bullet payments. The large lump-sum you receive can be directed towards the principal payment at the end of the loan tenure.
- Prepayment: If you have a high sales quarter or rapid rise in revenue, you can consider the prepayment option. Exercising the prepayment option involves prepaying your business loan before the term expires. While loan prepayment accelerates the process of becoming debt-free, early payments attract penalties that vary from one lender to the next. Moreover, prepayment penalties also vary depending on whether the loan is partially prepaid or foreclosed.
Business Loan Repayment Calculator
A business loan repayment calculator is a digital tool that helps you estimate the monthly EMIs payable on a business loan. You simply need to enter inputs like the loan amount, interest rate, and tenure details to estimate the EMI payable on the loan. Business loan repayment calculators also outline the proportion of principal and interest components in each of your EMI payments. You can also review the loan repayment schedule to understand how the loan balance reduces over time.
If you’re looking to reduce your loan burden, business loan calculators can help. These tools offer a wealth of information including the total interest payable on the loan, how the loan amount impacts your interest rate and EMIs, how changes in tenure impact total interest costs and EMIs, and more. Reviewing these details before applying for a loan helps you make an informed choice. Knowing your EMIs in advance helps you better plan business loan repayments. You can run multiple scenarios with different tenure, loan amount, and interest rate combinations to compare various lenders and select one that best suits your repayment capacity and requirements.
Conclusion
Planning business loan repayments can seem daunting at first, but with the right tips and strategies, you can easily master the art of managing repayments. Speeding up the repayment process is one of the best ways to free up funds for business growth and save on interest payments in the long-run. Making partial payments, increasing EMI percentage, refinancing your loan at a lower rate, opting for shorter tenures, and maintaining a positive relationship with the lender are some of the tips you can implement to become debt-free faster. Additionally, you further streamline the loan repayment process by carefully assessing repayment options and choosing one that best meets your requirements. For streamlined debt management, you can draft a comprehensive repayment plan using a business loan repayment calculator that estimates your EMIs beforehand.
FAQs
What happens if I don’t repay a business loan?
Defaulting on your business loan repayment can result in legal action by the lender. The lender can file a lawsuit against you. If you default on a secured loan, the lender can seize the assets pledged as collateral.
Can I save on interest by refinancing my loan?
Yes, you can save on interest payments by refinancing your loan. You can opt for a loan with a lower rate of interest or a shorter tenure to save on the overall interest payment.
Why is timely business loan repayment important?
Timely loan repayment is important to build a good credit history and establish yourself as a creditable borrower. A positive credit history ensures easier access to credit against more favourable terms.
Can I foreclose my business loan?
Yes, you can foreclose your business loan by paying the entire outstanding loan amount at once before the term ends. However, some lenders may levy a foreclosure penalty, while others may require a minimum number of EMI payments to be made before allowing you to foreclose the loan.
