Starting and maintaining a profitable business is a difficult task that requires time and monetary investment. A 2014 report found that entrepreneurs use loans to raise business capital and run their businesses in a bid to increase productivity and consequently increase the total profits accrued. However, some business owners have had a hard time understanding and coping with the concept of business loan hassle free.
This article provides insight on how best to deal with your business loans easily and efficiently without getting stressed out.
See Also: How to Get a Business Loan Fast and Easy
1. Do Not Default
The first rule of business loan management is not defaulting. A loan default is the action of not meeting your obligation in accordance to the agreement to repay a loan. This is normally expressed through missed payments, late payments, or completely avoided payments. The consequences of defaulting are painless in the first instance, and can be mistakenly ignored and treated as harmless attempts by the lender. First, your lender will politely contact you as a polite reminder to repay your loan. This will be followed by aggressive calls and personal visits, with the lender getting more aggressive as the default continues.
In the United States, defaulting on a business loan causes a drop in your business or personal credit score, or both. Depending on your business structure, your personal credit score could also be affected. This results in an increase in both current and future interest rates making it even harder for you to repay your loan. In extreme cases, a defaulter’s property and collateral are seized to allow the lender to recuperate the losses accrued from the defaulted amount. At this point, your lender has full rights to access and utilize your property and the registered collateral in whatever manner.
In case you default for any reason, it is advisable to negotiate the terms with your lender. As much as this option does not work most of the time, it is worthwhile because it will help your lender formulate an easier repayment plan and prevent a bad credit score. Alternatively, you could consider signing up for government debt relief options. These include a number of SBA Loan Programs in the United States, among other government-backed options.
2. Analyze Your Needs
While you have been lucky and have been granted the business loan you needed, the first thing you should do is develop a business plan to help prioritize areas that will need extra caution. An understanding of working capital, as well as forecasts on cash flow, profits and losses, will help calculate exactly how much capital you will need and how long you will take to repay the loan comfortably. Setting aside an overdraft will help cushion yourself from seasonal variations that lead to unexpected losses or minimum profits.
3. Organize Your Financial Details
A creditor will make certain that all necessary documents are scrutinized before granting you a business loan. In the United States, for example, a personal background check, résumé, business plan, business and personal credit reports, income tax returns, and financial statements are among the requirements for applying for a business loan. It is easier for you to organize these documents beforehand and plan accordingly.
4. Consolidate Business Loans
Debt consolidation is the process of merging several loans into one which in turn lowers the interest rate and extends the repayment period. This is a necessary and easy way to handle your business loans, especially when you have a hard time keeping up with different lenders. Consolidating these loans into one lessens the pressure on you, and your attention is only focused on one main loan, while you end up paying less each month. This type of loan allows you to stay organized, prevents further damage to your credit rating, and provides short-term relief to a heap of debts. It can also be either secured or unsecured, tied to some sort of collateral or not, respectively.
There are different ways of consolidating loans, peer-to-peer being one of them. Prosper, for example, is the premier peer-to-peer web lenders and works by allowing several individual investors to fund your loan. It accepts a minimum credit score of 640 and is available in 47 states in the United States. A major disadvantage is the fact that you are only allowed to repay your loan in a maximum of 60 months, a factor that might be unfavorable for some businesses. This is just an example of the many avenues that one can use to consolidate debts, so you should strive to find other means that are relevant to your type of loan. It is imperative to note that before settling on any debt consolidation service, one must have done extensive research to get reliable and accurate information on a particular service.
5. Credit Counseling
Business owners with large amounts of debts are usually in a quandary on how to easily handle their debt. This is where credit counseling comes in. A counselor working on behalf of a reputable non-profit credit-counseling agency will help you create a working debt repayment plan in an effort to help you better manage your money and debt repayment plans, thereby preventing you from getting into other debts while trying to repay an existing one. As much as this strategy will not reduce your business loan, you will certainly be at ease and less stressed, while having a clear plan on how to successfully settle your debt on time.
6. Debt Management
A business owner will usually hire a professional to negotiate the loan with creditors in an effort to reduce the monthly bills and lower the interest rates. However, the principal amount will remain the same. Instead of submitting your payment directly to your lenders, you will pay the debt management company which will in turn distribute payments to your various creditors. This is an advantageous solution if you are seeking to lower your interest rates and better plan yourself.
When choosing a debt management company, be extra cautious as there’s a great deal of fake companies about. These scam companies will not submit payments to creditors, which will only hurt your credit score even more. Moreover, future lenders will hesitate lending you any money when they discover that you are in a debt management program.
This is usually the last resort, especially chapter 11 bankruptcy. It is an expensive and complex process and is best used after other options such as consolidation and debt management have failed. Chapter 11 bankruptcy is the easiest and better option compared to Chapter 7 bankruptcy.
While chapter 11 is used to restructure your debts, allowing you to repay your business loan while still running the business without selling any assets or values, chapter 7 does not have a repayment plan and instead any assets that are unprotected by law are collected by a trustee and sold to repay the loan either in part or in full.
See Also: How to Get a Small Business Loan
Handling a business loan requires sound mind, ample research, and consultation with necessary financial experts who will help you analyze and realize the best options for a loan. Before applying for a loan, however, ensure that it is absolutely necessary and plan for it to prevent delving into further debts.
Have you had to take out a business loan? Do you have any tips to share with business owners who are considering applying for a loan? Let us know in the comments section below!