How to pay back a loan during slow seasons
Just about every small business finds itself in a cash crunch from time to time. In fact, in 2015, small U.S. businesses borrowed almost $1.2 trillion, and in the last twelve months, 73 percent of small businesses used financing, according to the Small Business Administration. This is to be expected, as most small businesses don’t have the deep pockets that larger corporations enjoy.
For many, the answer is working capital funding, either in the form of merchant funding or a business loan. Small business owners who have pursued these products have learned that its far easier and more convenient to borrow from a non-bank commercial lender. The harder part for some is knowing how to pay back a loan without compromising the viability of your business.
How to Pay Back a Loan
Business loan repayment is a serious issue when your company is in a slow period. Of course, it’s easier to pay back a $5,000 loan than a $500,000 loan, but whatever the size, it’s important to know how to pay back a loan. Here are some tips that can help a wide variety of small companies manage business loan repayment:
- Create or revise your budget: Every business needs a budget, even if it’s just some notes jotted down on a piece of paper. But it’s a far better idea to use budgeting or spreadsheet software that lets you visualize your upcoming cash flows. After all, how do you respond to a cash shortage if you don’t know the amounts of money flowing into and out of the business? Your working capital (current assets – current liabilities) is key; if it’s underwater, you’re fighting against the tide to keep your company afloat. To avoid drowning in a sea of unpayable bills, use your budget to make changes that minimize your expenditures and maximize your collections.
- Minimize expenditures: Examine your budget for opportunities to cut your cash outflows. Start by speaking with your suppliers and ask about extending terms. If some won’t play ball, try finding replacements. Postpone non-critical purchases, slow down the restocking of inventory, cut back on employee work hours, withhold retirement plan employee contributions and in general avoid spending money for as long as possible. However, never miss a critical payment, such as ones to a lender or to the IRS, since missed payments can have a disastrous effect on your business.
- Accelerate collections: You might be in a position to accelerate collections. For example, if you are due payments from commercial customers, try negotiating with them, perhaps offering a special discount for a quick payment.Another tactic is to apply for a merchant cash advance, in which you receive cash now in return for the remittance of upcoming credit card receipts. If you have any superfluous equipment, now would be a good time to liquidate it. You might want to wholesale your inventory through an auction to raise cash fast. If you get paid by the hour or by a unit rate, perhaps you can work extra hours to increase revenue. If your business sells products or services that feature elastic prices, you might be able to charge more without losing sales volume. This is often possible when there isn’t any easily substitutable offering. Some companies can raise money by selling equity in the business to junior investors. This is a big step and should not be taken lightly.
- Talk with your lender: If you’re having trouble paying back your loan, speak to the lender about resetting terms in a way that will work for you. It might involve extending the length of the loan, which cuts the size of the payments, even if the interest rate goes up. Perhaps you can arrange to pay smaller amounts more frequently. You might be able to adjust the payment date to one that better coincides with the timing of your collections.
It makes sense to establish contingency plans for times when working capital is tight. Those plans should include identifying and establishing a relationship with a reputable lender that can provide both business loans and merchant cash advances. A good lender is on your side, and will work with you to help you survive hard times.