Whether you launch a business or eye its growth, every stage may require some funding. Nowadays, finding a reputable lending institution is not much of a challenge. The application process and fund transfers are also quick. As soon as the cash is in, you can plan to spend it thoughtfully and work around the repayments, which come with interest rates. While securing finance is easy, you can struggle in repaying. Here is an overview of everything related to loan repayment so that you know how to deal with this aspect.
Repaying the small business loan by Michael Giannulis
It is essential to know whether you have to pay a fixed or variable amount and at what intervals. You also have to be aware of the repayment methods.
Fixed VS variable payments
The fixed loan terms imply you have to pay the same amount every repayment cycle. For instance, if it is a bi-weekly arrangement, you will pay $350 or so (as per the terms) on the due dates until you finally clear the whole amount. This amount will not increase or decrease unless an unpredictable situation arises, the chances for which tend to be quite slim.
On the other, a variable rate loan means your repayment amount can vary. One of the reasons behind this can be the fluctuation in the prime interest rate. If it increases, your interest amount can increase, adding to what you have to pay, and if it dips, the interest rate and repayment amount will also decline. Lenders usually do this in the case of long-term loans.
Time and process of repayment
You often have to begin to repay your loan based on the terms of the repayment, which can be monthly, fortnightly, weekly, or daily. To be precise, your payment cycle can be thirty days from the day of the receipt of the funds. If it falls under a weekly period, you may have to pay from the next week of receiving cash in your bank. However, this varies from one loan type to another. Some credit lines demand repayment after the draw period is over.
Most of the lenders and financial institutions use an automated clearing house (ACH) or a computerized repayment process so that the repayment amount gets timely deducted from the concerned account and enter their system. You need to keep adequate funds in your account at that time to avoid defaulting. A few of them allow cheque payments, on which they can charge a processing fee. It can be an additional cost for your business.
The term of loan repayment can also vary from a couple of months to more than a decade. Many also allow you to pay a higher installment amount on every payment or clear your debt early. Due to this, you don’t have to continue to pay until the term length. You can get rid of it soon, and end up saving some money eventually.
The standard practices for loan repayment
It can sound simple that keep your cash ready in your account when the date is approaching, and you are done. But budget and other hiccups can cause enough challenges if you don’t prepare well. Budgeting comes in handy in maintaining adequate funds in the account for different purposes, including loan installments, purchases, or anything else. When drawing a plan around it, you need to calculate your revenue, costs, and profits or cash flow. It can give you a better insight into how much money will be there for capital expenses. Tracking transactions is also necessary to know the amount of cash you need for your monthly payments and that it never runs short.
Some well-known entrepreneurs like Michael Giannulis suggest that you should also know the late payment policy beforehand. There can be certain situations when you fail to pay. Lenders acknowledge this, and that’s why they offer delay payment solutions too. However, their approach can vary. Some may not charge any late fee if you pay within the grace period. They will not report it to the credit bureau as well. Others let you skip some of the payment amounts but add them to the final repayment cycle. No matter what it is, learning about this policy can give you a bit of mental peace and help you return on track.
Due to some unforeseen circumstances, you may not be able to clear your monthly or weekly loan installments. If you fail to pay on time, keep your lender in the loop so that it doesn’t think you have defaulted. Also, you get an opportunity to work around a favorable alternative. To protect yourself from becoming a defaulter, you have to take proactive steps and fix the problems. Some companies opt for refinancing or negotiation.
Refinancing your debt can help you to pay the outstanding amount. It can be beneficial for two reasons. When you struggle with repayment, you need to have a longer-term loan that requires smaller repays or come at cheaper interest rates and charges. Secondly, refinancing is referred to as a better debt.
Paying the final installment can relieve your mind from the massive burden. However, before you bask in this joy, make sure you do two things. One, you have to make sure that the automatic deduction of the loan repayment amount from your account has stopped. If it doesn’t, you have to communicate this to the lender at the earliest and fix it. Another thing you have to verify is whether your lender has leveled any legal claim against your company. From the Uniform Commercial Code (UCC) records, you can find it easily. Any liens against your business can potentially damage the chances of securing future finances.
Small business suffers from the lack of cash flow, and for them, a business loan can be the only way to fuel growth. While getting a loan is not so much of a problem nowadays, you may face difficulty with repayment due to unpredictable fluctuations in your business. Hence, it is essential to be on your guard and figure out ways to solve problems.