How to handle a loan for a new business
If your company is able to obtain a startup loan, that’s good news. These are great ways to boost cash flow and pay for large expenses that you may incur as your business grows. However, be sure you understand how you will handle your startup business loan and what happens if you are unable to repay it before taking on any debt or even applying.
Five pointers for handling a business loan at startup
Like all forms of business financing, a startup business loan is not different. To make paying off your debt as quickly and easily as possible, concentrate on making on-time payments while you learn how to manage a startup business loan.
Make loan payments a priority in your spending plan
As you proceed, paying off debt ought to be your top concern. Your startup business loan payment should be the focal point of your monthly budget. Remain ahead of the game, even if it means making other cuts. In the end, your loan will raise your company’s credit score and facilitate future borrowing.
Enroll in automatic payment plans
Enroll in autopay if you want the easiest way to manage a startup business loan. One of the best ways to stay on top of your loan is to set up automatic payments if you have consistent cash flow. You have one less bill to physically pay each month because these payments are taken out of your company’s bank account.
Even though you have to make sure the payment is processed, it should save you time in the long run. Additionally, your company won’t incur late fees or penalties if you consistently have enough funds in your account to cover your loan payment.
The following are the top three reasons that new business owners apply for financing, per the 2022 Small Business Credit Survey:
- Growing the company
- covering operating costs
- Changing out or fixing capital assets
Refrain from accumulating more debt
For new companies, startup loans can be an invaluable source of funding. However, you should never take on more debt than your company can afford to pay back. Only take on one debt at a time because even tiny additional debts run the risk of taxing a startup’s finances. Businesses that have low debt-service coverage ratios (DSCR) will be better positioned to borrow money in the future for purposes of expansion or unanticipated expenses.
Use additional funds for payments
Growth may require funding a new project or hiring a new staff member, but you might be better off using any extra money to pay back your loan. Even one or two extra payments during a seasonal uptick in sales can have a significant impact on the total amount of interest your company pays on its startup business loan.
To find out if going this route makes sense, use a business loan calculator. Furthermore, be sure to review your loan agreement for any prepayment penalties that might increase the overall cost of taking this route.
Speak with your lender
Maintain communication with your lender, particularly if you obtained your loan via your bank. An open line of communication is essential for problem solving. If you have trouble making payments in the future, a lender who is familiar with your company’s operations may be able to restructure your loan, postpone payments, or assist you in creating a debt consolidation plan.
According to the 2022 Small Business Credit Survey, startups submitted more applications for business loans and credit lines than for equipment loans, SBA loans, or personal loans. If you’re still looking, you can select the ideal kind of startup loan for your requirements by using the following guides:
Personal versus business loans
What is a business line of credit?
Microloans from SBA
What is a loan for equipment?
What occurs if a startup loan is not repaid?
Being in default on a loan has consequences that can impact your personal and business finances. While avoiding default is always crucial, it becomes even more so during the startup stage.
Your personal credit score will be impacted in addition to your business credit because startup loans usually require a personal guarantee. Your personal assets may be sued by the lender in order to recoup their losses. And whatever collateral you put up will be seized by the lender. Thus, ensure that you understand how to handle a startup business loan before taking out any financing for your company. If you need more assistance, speak with a financial advisor.
Prior to taking on any debt, make a plan for how you will pay it back and deal with backup options in case something goes wrong. Additionally, if your startup business loan came with a high interest rate, you might want to think about refinancing when your credit gets better and your company grows in order to reduce your monthly expenses.