April 1, 2023

3 Ways to Strengthen Business Loan Repayment

Congratulations!!! You and your team were able to get a business loan to help the company grow after a lot of time, paperwork, and research. What next? What should you do with the money after it has been deposited into your bank account from the loan? Sincerely, the obvious is given little consideration: How will the repayment of this loan affect the business? I would suggest that during the stages prior to loan approval, this is thought about, but once the money has been spent, little or no consideration is given to repayment until it becomes a problem. In this article, I hope to provide you with three strategies for making the repayment of the business loan easier so that neither you nor your company face any difficulties.

Priority One: Be Accurate About the Terms of the Loan Money has a way of blinding us to common sense, especially when we need it. Owners of businesses are no different. A person’s willingness to make concessions in order to obtain the capital can be overshadowed by their sheer excitement and sense of accomplishment. Be sure that the terms of the loan are acceptable to you and your business rather than being completely captivated by the “Yes” or “No” response. Don’t agree to anything you won’t be able to carry out during the loan’s agreed-upon term.

The second: Short-Term Cash Flow for the Project I understand, math. Most people experience stomach upset when the word is mentioned occasionally. Take some Pepto-Bismol and get to work if that’s the case. You will be extremely grateful that you did. I am not recommending a comprehensive cash flow analysis here; rather, I am suggesting that you conduct a realistic analysis of the loan’s effect on cash inflows and cash outflows in terms of repayment. What is the repayment frequency and amount, according to the terms? Keep in mind that this repayment amount must be added to fixed overhead rather than a variable cost.

The third item: Plan for the worst case scenario and have a plan B and a plan C Life is organic, and no matter how meticulously we plan, it always seems to come up unexpectedly. The repayment of a business loan is no different. Yes, there is a mutually agreed-upon repayment plan during the pre-approval due diligence phase that almost certainly includes collateral (real and/or personal property), but life happens, and the plan can get off track. What can be done about this? Plan b is always a good backup, and plan c is even better. You need to have a different cash flow source of repayment, such as earnings, an asset sale, or an infusion of invested capital, in the event that the first option for repayment becomes invalid.

In conclusion, if you are approved for a business loan, remember to carefully consider the impact of repayment on your company’s cash flow. The last thing you want to do is not give it much thought because, in the end, business loans must be repaid in full, with or without interest.

Jericho Business Advisors offers small business owners and operators value-added consultation and advisory services in the areas of accounting, taxation, and financing.

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