Small Business Loan Repayment: 5 Proven Tips to Stay Debt-Free

Many small and medium-sized business owners hesitate to borrow money from banks or NBFCs due to the constant stress of small business loan repayment or the fear of legal action in case of a default.

However, at some point, taking a business loan may become essential to keep operations running or to scale up. So, how can borrowers manage this debt responsibly and avoid feeling overwhelmed?

The key lies in planning a smart small business loan repayment strategy and staying committed to timely payments.

Top 5 Tips for Small Business Loan Repayment

There are several effective ways to stay on top of your repayments and reduce your financial burden. Here are five golden rules that can help small business owners repay their loans faster and become debt-free with confidence.

1) Make Timely Payments

Loan repayments are usually channelized through equated monthly payments (EMIs). Missing a single EMI or even delaying the due installment can affect the credit score.

Also, it will bounce back with a hefty interest on the unpaid amount and a penalty charge. Since lenders mostly do an applicant background check through credit profile, a single incident of missed EMI can negate the chances of future loans for other needs in life. Reducing unnecessary expenses and securing timely payments from clients can help to save funds for the timely payment of EMIs.

2) Reduce The Loan Tenor, Increase The EMI

The interest on a loan is calculated on the outstanding principal amount. Quick repayment of the principal amount means less interest and more savings. A smaller EMI stretching for a long period actually costs more than a loan taken for a shorter tenor on higher EMI.

To lower the interest burden borrowers can pay a little extra in addition to the regular EMI. One easy way of doing it is by increasing the EMI every year by a minimal percentage. But one never should bite off more than one can chew!

Applicants with no fixed income limit can choose to do partial pre-payments whenever possible. But repaying lump sum amount is useful only during the initial loan tenor when the outstanding principal is more.

3) Go For Direct Debit

Missing a due date for loan repayment results in a heavy penalty. By enabling the autopay, or automatic payment, feature users can schedule a predetermined date for deducting a fixed amount equivalent to their EMIs from their bank accounts.

However, before enabling the autopay function, borrowers must maintain a minimum balance in the bank account to avoid bounced payments and extra penalties.

4) Refinance The Loan

Substituting a high-cost loan through refinancing for cheaper loan options is a good way to lessen the burden. It can be especially advantageous if it is done in the early years and if the loan prepayment fee and service charges levied by the lender are comparatively lesser than the newer interest rate.

Borrowers should also keep an eye on the overall interest rate cycle in the economy. Most commercial banks and non-bank lenders are quick to raise rates on existing loans if the Reserve Bank of India hikes benchmark rates. But most lenders are slow when it comes to reducing rates on existing loans. Refinancing can be a good option in such cases if another lender is offering a loan at lower rates.

5) Maintain Good Relationship With Creditors

When times are challenging and repayments seem hard, it is good to be honest with lenders. Sharing problems with the lending partner builds trust that can possibly open alternative ways to manage the debt. Many a time, lenders offer a concession or more time to borrowers to repay their loans so as to avoid marking the debt as a non-performing asset in their books. A good and cordial relationship with the lenders can ease the process.

Conclusion

Loans are a convenient way to fund a business. Borrowing won’t be an unpleasant experience if the business loan repayment plan is effectively managed.

Part-payments of loans to lower the existing debt reduces the principal amount and the interest on it. Switching to a cheaper loan through refinance can also result in more savings.

However, despite your best intentions, if you fail to manage funds to pay off the EMI for a genuine reason, you should inform the lender and try to re-negotiate the loan terms.

IIFL Finance, a well-known non-bank financing company that offers a variety of business loans at competitive interest rate, provides flexible repayment terms to borrowers. It also offers pre-payment and foreclosure options at minimal charges to lower your debt burden.