Like most small business owners, you may have taken a small business loan or two to help your company grow – a lifeline when your business faced a cash flow crunch. Being able to access cash when you needed it was critical to sustain your business growth for sure.
The obvious next step is the loan repayments.
Usually, everything goes smooth unless you hit unexpected cash flow roadblocks or take up unanticipated large-scale projects, lose large contract jobs, or a major customer fails to pay on time. And then you aren’t able to repay on time, the consequences of which can be profound in the long run.
What happens if you don’t pay back a small business loan?
- Heavy penalty fees will be levied
- As loans become more delinquent, and you aren’t transparent with money lenders, they tend to become more aggressive with their collections strategy
- Delinquent loans are reported to personal and business credit bureaus, so your credit scores will be affected. This makes it difficult to secure small business loans in the future.
- Court litigation for delinquent loans
- Seizing of personal or business assets if you had agreed to a personal guarantee, or the lender has a lien on your business assets
But rest assured, you can manage your small business loan repayments in a stress-free manner. Here are some effective strategies to help you.
1. Be transparent with your money lender
Like all organizations, small business money lenders typically don’t prefer surprises. Be transparent and speak upfront to them about any difficulty in repayment. Do this before a collections agent contacts you, and before it becomes a delinquent loan and gets reported to a credit rating agency. Your money lender will work with you and may suggest a repayment holiday for an agreed period, work out an affordable payment plan, or change other terms of your loan.
2. Optimize expenses, keep a close watch on cash flows
Pay close attention to how and where your business spends its finances. Be wary of spending your loan amount on non-business transactions or overspending the amount kept aside for repayments. Spend only after thorough cost-benefit evaluation of each expense and maintain a lean budget in the early stages of your business. Prioritize those areas that relate to the core competencies of your business. Postpone buying non-critical equipment, or hiring non-critical staff. Consider selling off unused equipment, negotiate prices with vendors and avail discounts to minimize costs.
Maintain a healthy cash flow – this is imperative when you have loans to repay.
- Invoice as soon as you deliver your products or services. The faster you invoice, the sooner you should get paid.
- Keep all accounting and reporting up to date, so that you spot errors sooner than later, and take quick corrective actions.
- Keep a cash cushion or a cash reserve to help you get through unexpected slumps.
- Find new revenue sources
It is as important to find new income sources as it is to tighten your spend. Think along these lines as applicable to your line of business.
- Make all efforts to retain regular paying customers with attractive offers or more value-added services
- Attract new customers through innovative, cost-effective marketing tactics.
- Charge penalties to clients who pay late and offer incentives to those who pay on time.
- Maintain a good credit score
All small businesses intend to stick to good credit practices. They do not intend to avoid missing credit card or loan payments or hit credit card limits. Consolidate your credit card balances into a single monthly payment to reduce the interest rate on the balance. This makes it quicker and easier to pay off debt. Set up direct debits or electronic reminders to pay all your bills on time including utility bills and vendor payments.
3. Pay more when you can
Increase repayments whenever you can so that you save on the interest charges you would otherwise pay over the remaining term of the loan. You also end up repaying the loan faster, which frees up extra cash at the end. Do this especially when seasonal growth leads to spurts in cash flow.
4. Refinance or consolidate loans
If you are looking for small business loans in Australia, opt for refinancing or consolidating them into a single one. Negotiate favorable contract terms if you have a good credit history. When you refinance business debt with a new loan, you gain the benefit of lower interest rates and better payment terms than the first loan, and one that extends over a longer period of time. The refinanced loan provides you the capital to pay off the previous debt and becomes easier to manage.
5. Use government assistance if you need to
Most governments encourage small businesses with resources to thrive, such as the information services and assistance provided by the Australian Small Business Advisory Services. Look for business grants, funding and support programs to stay competitive, which are also easy to apply for. Seek out financial counseling or legal advice programs by the government agencies, community organizations, and community legal centers.
These strategies will help you tackle any debt-related stress in the long run. Loans and repayments should definitely not sabotage your small business. They are clearly meant to empower, and not overpower your small business.
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