Understanding Business Loan Repayment Structure
Wondering how a business loan repayment works? Learn everything you need to know about loan repayment and why it's important with this ultimate guide.
Loans are financial resources to fulfil all planned as well as unplanned needs. Several internal and external factors can contribute to situations when a borrower is facing a problem in repaying the debt.
But a businessperson needs to plan for such exigencies to keep his/her credit score at a respectable level for future borrowing needs.
Loan Repayment Methods
Mostly, repayments on business loans start immediately from a month after the disbursement. But it also depends on the lender, the loan structure as well as the type of business loan availed.
Lenders use different methods to calculate loan repayment schedules depending on the borrowers needs, the institutional interest rate policy, loan tenor, and the purpose of the borrowed money. Listed below are some of the loan repayment options:
• Equated Monthly Instalments (EMI)
The loan amount is returned to the lender through a series of scheduled monthly payments, also known as EMIs, which include both the principal and interest amount.
Interest and other charges that provide income to the lender is the compensation charged by the lender and the cost of borrowing.
Every month, a pre-fixed installment is to be paid to the lender on a particular date until the debt is cleared at the end of the term. The interest on the pending principal amount accumulates over the specified loan period on a monthly basis.
During the initial phase of the tenor the interest component is more than the principal component. With each repayment, the principal sum gradually reduces, helping to decrease the interest generated for each month.
The due amount to be repaid by the borrower depends on his/her financial capacity as well as on the term, tenor and interest charged on the loan. Borrowers can calculate business loan repayments by using an online EMI calculator to calculate the exact EMI amount.
• Bullet Payments
In this method of loan repayment, the borrowers pay only the interest accumulated on the principal for the loan duration. It is only at the end of the loan period that the principal is repaid through a single payment.
Popularly known as interest-only loans, this type of repayment method is extended for a fixed term, with the maximum period being about five years.
Cash Versus Digital Modes
Some lenders allow certain types of borrowers who depend on mostly cash receipts to visit the bank branch and deposit cash at the counter. But they prefer to offer borrowers faster and fool-proof means of repayment via digital payment modes like UPI, net banking, NEFT, and ECS.
These digital modes help a borrower avoid missing an interest payment date and the time involved in physically going to the branch every month.
Why Is Loan Repayment Important?
Timely repayment of loans not only reduces one’s liability but also helps to build a good credit history. A positive credit history with no missed installments helps to qualify for a large loan at a negotiable interest rate in future.
How To Repay Business Loans Successfully?
To avoid defaulting on a business loan and to make timely repayments, business owners must consider the following:
A Well-Planned Budget:
An unbiased financial assessment reflecting the closest possible working capital requirement is of immense help in ascertaining the amount of the loan required to sustain a business. Borrowing comes with a cost. So, irrational borrowing can incur unnecessary expenses.
Managing Cash Flow:
Cash flow includes the cash generated from operations, investing and financing after deducting the operational expenses. In the absence of a healthy cash flow management system, a business may fail to meet the daily operational expenses or may even miss EMIs.
Keeping Business And Personal Expenses Separate:
It is never advisable to use personal savings or one’s retirement funds to meet financial crunches. Likewise, loans taken to expand a business or to buy new machinery must not be utilized for personal needs.
Many a time, a borrower may find it difficult to repay the loan due to cash flow issues, delays in receiving payment from their own customers or any other reason. Sitting idle over a problem of this level helps in no way.
Borrowers must inform their lenders about the current situation and ask for help by refinancing the loan. It is good to maintain a positive relationship with the lender. It can help the borrower with any of the following:
• Extension of loan
• Reduced interest rates
• A loan arbitration
• An arrangement for delayed payment for a short period
Refinancing a loan is usually better than defaulting on a loan. Refinancing not only helps one with revised interest rates, but also helps to increase the loan tenor.
Lenders, especially non-banking finance companies such as IIFL Finance, provide business loans for a variety of purposes. NBFCs also customise loan tenors and repayment schedules for borrowers. Besides, they provide an easy-to-understand EMI calculator to decide how much loan one should take given the repaying capacity.
Business owners must ensure they repay the full amount to the lender. To do so, they need to manage the cash flow in a way that covers the interest payment due every month.
In case of any unanticipated situations that may affect payment of one or more scheduled installments, most financial institutions offer refinancing facilities. Reputed lenders like IIFL Finance also have financial advisors who will listen to a borrower’s problem and find a solution.