4 Tips for Paying Off Business Loans

Editor’s Note: This post was originally published in February 2019. 

One of the top causes of small business failure is a lack of funding. Being short on funds can not only cause problems with launching your business, it can also make it impossible to survive the first few years. 

If your business needs capital to launch, operate or grow, one solution is to take out a business loan. Having a business loan can help ensure you have enough money to cover your expenses until profits start rolling in. 

But what happens if you struggle to pay the money back? If you’re not sure how you’ll pay back business debt, we’ve got tips to help you manage your payments while staying on top of your business operations.

1. Keep part of your business loan in savings

It can seem like a blessing to be approved for a small business loan, and to see thousands of dollars appear in your bank account. But you have to remember that this money has to be paid back. For most loans, the first payment will be due almost immediately.

So instead of spending it all, consider putting at least six months’ worth of loan payments into a savings account. That way, even if your business isn’t profitable right away, you’ll have a way to avoid defaulting on the loan.

2. Add business loan payments to your monthly budget

As a business owner, you have a lot of expenses to manage. You may have an office lease, payroll, marketing expenses and more. All of these expenses are part and parcel of running a business. But are you leaving anything out?

If you haven’t included your loan payment in the budget, you’re definitely forgetting something! Failing to include the payment in your budget could jeopardize your business, so make sure you add it as a line item, and confirm that your budget allows you to pay the expense on time.

3. Save and reinvest some of your profits

Your loans aren’t the only items that should be added to your budget. If you’re turning a profit, you should also budget a portion or your profit to reinvest in your company.

You may not have much to set aside, but it’s important to build the habit of not spending everything. The money you save should be allocated for the following costs:

1. Unexpected expenses: You never know when your computer will break or when a box of your products might get damaged. Saving money will help you reduce financial risk for your business and prevent these roadblocks from shutting down your operations.
2. Business growth: Depending on your business, you may want to do things like invest in new equipment, hire more employees or expand your product line.

4. Pay extra on your loan each month

Every loan has a set timeline for repayment, also known as a “term.” But that doesn’t mean you have to stick to that payment schedule. If you pay extra each month, you can save money on interest charges and be free of the debt sooner. 

Even paying 10% more each month can help. For example, let’s say you borrow $25,000 at 11% APR, and your minimum payment is $544. If you stick to that payment amount, it would take you five years to pay off the loan, and cost you $7,614 in interest. 

However, if you paid $600 a month instead, the loan would be paid off in just under 4.5 years, and you would only pay $6,640 in interest. That’s a savings of $974.

On top of that, you can put the money you save on interest toward your business.

How to use business loans responsibly

A small business loan can be a great tool for investing in your company. Yes, you’ll need to pay it back, plus interest and fees, but that doesn’t mean you can’t grow your business at the same time. 

To avoid trouble, be mindful about how much financing you take on from the start. As a general rule of thumb, you should only borrow the amount you need to ensure you have cash flow for your launch, or for a specific growth plan. Additionally, you should always make sure the payment fits within your business budget before accepting the loan.

About the Author: Christine Soeun Choi is an SEO associate at Fit Small Businessspecializing in digital marketing. Currently based in NYC, she has a background in business studies and math with a passion for business development. When not helping small business owners, Christine enjoys taking photos, exploring artwork, and traveling