Top tips to pay off your business loan faster
There are over 2 million Australian small businesses, with roughly half of them taking out some form of finance or loan. Having access to good financial solutions such as a business loan is important. A loan can enable your business to grow more quickly, ease some cash flow concerns, expand and help things run more smoothly.
A business loan is a sum of money lent to a business with monthly repayments that occur and interest charged. There is an agreed repayment period in place. A business loan can improve your business cash flow, infrastructure, and operations. It can also enable business growth and expansion, helping to seize opportunities more quickly.
If a business loan is used to its best potential, a loan can be a very beneficial resource. If you’re a business owner with a small business loan, here are our top ways to get the most out of your loan and how to better manage the repayments. We also include some interesting ways to pay off your loan sooner rather than later, so you can start reaping the rewards.
Increase repayment frequency
Increasing the frequency of loan repayments from e.g. fortnightly to weekly means that repayments will be applied more often so less interest can accrue. Also, you will be increasing the total amount of yearly repayments. Depending on the amount and length of the loan, this strategy could shorten the overall loan term.
Make additional repayments when you can
If you find that you have that extra cash flow to make an additional repayment, put it back into the business loan. If your business is expecting a large amount of money coming in, such as a tax return, then using this to make extra repayments can reduce the life of the loan. This is usually one of the most common times that businesses will find themselves with an extra sum of money. Another time to take advantage of is peak season. By extending your operating hours during peak season and taking advantage of the extra business for example. You could use that extra money to pay down the loan. Maybe you’ll even find that you can make more than just one extra repayment by scrutinising your incomings.
Top up your monthly repayments
Just by adding a little bit of extra each month to your loan repayment can pay off in the long run. The best way to do this is to round up your regular contributions. Let’s say you take on a 9% business loan of $50,000. When using the Lumi online loan calculator we can see that would be a total interest of $9,163.15 over the life of a 24-month loan, with monthly repayments being $2,465.13. By rounding up what you pay to $3,000 each month, it means you will be paying an extra $6,000 per year. This can reduce your total amount of interest paid significantly and help the loan be paid off sooner.
Increase your earning potential
Increasing income is usually the primary goal of most businesses. Business owners are often looking for new ways to bring extra cash flow into the business and more often than not, this is the reason for taking out a loan in the first place. Such as purchasing equipment, expanding to more office space, or hiring more staff to manage peak seasons. And now with the improvements to your business, the extra funds can be used to pay down the loan faster leaving you with more dispersible cash per month.
Refinance your loan
If a lender comes around offering a better deal on interest rates, you could always consider refinancing your loan. This isn’t possible with all loan types as some lenders do not allow for a loan to be closed before the loan term. Or charge large fees to do so. However, your lender may allow for a business loan transfer after a certain number of equated monthly instalments (EMI) have been made. Acquiring a lower interest rate on a new loan will mean a lower amount of total interest paid on the loan.
Reduce ongoing costs
When trying to find ways to pay down your debt faster, you could take a broad look at your ongoing costs. This can be done by shopping around with your utility providers. Investigating all of your suppliers for their best possible rate. You could start with your internet plan and check you’re getting the best deal. Could you negotiate a better deal on electricity or your rental payments? Another thing to consider is purchasing the stock you need in a bulk order and requesting a discount. Cutting back on any unnecessary items can save the business money. Those savings can be put back into the loan to pay it down quicker.
What are the benefits of paying off your loan sooner?
Did you know that maintaining some sort of line of credit can have advantages for a business such as tax deductions? You may be able to claim your loan repayments at tax time, you can find out more about claiming loan repayments here.
Paying off your business loan sooner also has a great number of benefits. In a nutshell, some of these benefits include:
- Save money by potentially paying less in total interest
- Increase your cash flow by eliminating the monthly loan repayments
- Ability to obtain another loan for another business expansion
- Improve your credit history and credit score
- One less financial commitment off your plate
As always when applying for a loan it is best to research a lender that suits you. Check the terms and conditions of the loan. Avoid lenders restricting you from paying off the loan early. Many lenders may not have the option to pay your loan off sooner. And if so, may require hefty discharge fees on top to pay the loan off early.
Lumi encourages the borrower to pay their loan off sooner and offers financial solutions that make it easy for your business to do so.