Debt is one person’s liability, but another person’s asset, rightly said economist Paul Krugman. If you are a business owner, then you should understand the implications of taking a loan and the worth of Krugman’s words. According to a lending platform which conducted an analysis of funding by NBFCs and P2P sector found that nearly 64% of all loans disbursed were towards small and medium-sized businesses.
Even as SMEs contribute heavily towards overall economic growth most businesses face issues with assessing loans from banks and financial institutions. Some of the reasons could be inadequate financial records, lack of credit histories, especially in tier II and III cities, making it tougher for SMEs to access loans.
Once the application is approved and the loan gets sanctioned, the next step is to keep up with the process of loan repayment. Here are things you should know about business loan repayment to ensure a clean history of credit.
1) Chalk out a business loan repayment plan: As a business owner you will have requirement of working capital more often than once in your business cycle. This prompts SMEs to apply for loans, but the process doesn’t merely ends at approval of the loan. It is important to chalk out a business loan repayment plan as soon as the loan is cleared. It is important because timely business loan repayment reflects on the credit score which usually determines the ability to get loans in the future. Firstly, you should know whether the loan approved is based on fixed or variable payment, which means how often the payment has to be done. You should also know the interest rate at which you took the loan so that SME loan repayment amount can be calculated. You can check this amount from lender or calculate the payment online with the help of repayment calculator. Next you need to provide options for automatic repayment system where the bank can be instructed to deduct the payment directly from the bank account. Make sure there are funds in the account at the time of payment.
2) Check the scope for loan prepayment: At the time of loan approval the bank should intimate you about prepayment opportunities of SME business loan. This means paying back the loan before the approved tenure. Many business owners would want to repay loans if there is extra gain or profit generated from business. One can make a lump sum payment and finish the entire loan before the actual tenure. This could save the interest amount besides strengthening credit score. However, some lenders charge a penalty for prepaying, because it loses out on the interest which a full-fledged loan would have generated. Ensure that the cash flow from your business is enough to allow you prepay the loan in advance. A loan calculator can easily help you determine the prepayment amount. You can simply check on the latest SME business loan including the rate of interest, tenure on Lendingkart and decide on prepayment.
3) Keep a note on credit ratings: It is critical to take a note of your credit ratings and always communicate any delay in payment of loan with the lender. If the loans are not paid timely or there are too many lags, then you may be considered a defaulter. In such a scenario make sure the reason is communicated to the lender to avoid any impact on your credit ratings. You may also find alternate payments schedule in case the present schedule is not doable.
4) Consider refinance of debt: Did you know about the option to refinance debt into a cheaper loan? But before you think of debt refinance you should understand its importance and evaluate all the reasons. There are times when the SME business loans become attractive where the tenure is longer, installments are smaller, and the rate of interest is cheaper. You can decide to refinance the old debt, especially if the business is doing well. A repayment calculator can help you check on the installments of the new loan.
5) Keep a close watch on growth: A SME loan repayment can pinch you if the loan that you have taken for business is not yielding desired results. It is not about funding the business but also keeping a tab on the growth and the effectiveness of the loan. Make sure that the SME loan repayment is on track and that business graphs are moving in the right direction. Moreover, if at any point you feel payments are difficult to sustain then look for ways to reduce the risk of default.
Make sure every loan taken is used wisely because it could be a step towards creating a successful business.
When should I start repaying my business loan?
When it comes to small business loan repayment, the common practice is to commence repayments promptly, usually starting from the subsequent month.
- The exact repayment timing can fluctuate, contingent on your lender and the particulars of your small business loan agreement.
- Various categories of small business loans, such as Lines of Credit or Overdraft facilities, may not adhere to a rigid, fixed repayment schedule.
- It is advisable to discuss with your lender to devise a small business loan repayment plan that aligns with your cash flow and monthly income.
How are the repayments made?
The era of physically visiting a bank branch, completing deposit slips, enduring lengthy queues, and making cash deposits at the teller’s window is a thing of the past. Traditional in-branch banking has become obsolete. In today’s digital age, all banking operations are conducted online, providing you with access to these convenient business loan repayment methods for more effective debt management:
- Establishing standing instructions for automated repayments.
- Employing NEFT mandates for seamless transactions.
- Implementing ECS (Electronic Clearing Service) for hassle-free payments.
- Accessing your account through internet banking for effortless repayments.
- Harnessing the convenience of UPI (Unified Payments Interface) for swift transactions.
Digital payment methods offer unparalleled speed and immediacy, significantly reducing the risk of late payments and defaults, making them the preferred choice for modern businesses.
In conclusion
Navigating the landscape of business loan repayment can indeed be a daunting endeavour. However, entrepreneurs must recognise that these loans, when managed wisely, can serve as a catalyst for business growth and success. The repayment of loans in business can effectively transform debt from a liability into a valuable asset. Despite the challenges many small and medium-sized enterprises face in accessing loans, prudent financial planning and a well-structured repayment plan can pave the way for a brighter future. With diligence and foresight, businesses can leverage these financial tools to thrive and prosper in their respective industries.
FAQs
1. What are the different kinds of business loans available in the market?
Various types of business loans are accessible in the market, including term loans, lines of credit, equipment financing, SBA loans, and invoice factoring. Each serves specific financial needs and purposes.
2. What are the repayment tenures available with business loans?
Repayment tenures for business loans can vary widely, typically ranging from short-term options like 3–12 months for working capital loans to long-term loans with 5–25 years repayment periods, depending on the loan type and lender.
3. What are the repayment channels for a business loan?
Repayment channels for a business loan have evolved significantly. Today, businesses can conveniently manage repayments through various digital methods, including NEFT, ECS, UPI, and net banking, making timely repayments more accessible and efficient.
4. What happens when you don’t pay back a business loan?
It can have serious consequences when you don’t pay back a business loan. This typically includes damage to your credit score, legal actions by the lender, and potentially even the loss of assets used as collateral.
5. Can I be put in jail for not paying back a business loan?
No, you cannot be put in jail solely for not repaying a business loan. However, the lender may take legal actions to recover the debt, which could lead to financial penalties or asset seizure.
6. Can I lend myself money from my business?
Yes, you can lend yourself money from your business, commonly known as a shareholder loan. Ensure proper documentation and adherence to tax regulations to avoid legal and financial complications.
