Paying Off Your First Business Loan: 10 Tips for Staying on Track

Paying off your first business loan is, perhaps, an even more significant milestone than scoring the loan in the first place. Staying on top of your financial obligations not only shows that you can take proper charge of your business, but it also helps you maintain a positive relationship with lenders, ultimately improving your business’s ability to adapt to various scenarios that require extra liquidity. If you’ve already taken out your first loan, here are ten tips to help you manage and pay it off efficiently:

1. Create a Repayment Plan 

In the Philippines, new business owners often make the mistake of agreeing to loans for businesses without making adequate repayment plans. Building a clear repayment roadmap before you take on a loan will keep you from missing payments and ensure that you’re committed to repaying the loan on time. 

Fortunately, you can still create a repayment plan even if you’ve already agreed to the loan. To develop a detailed repayment plan, you’ll need to take track of your business’s performance, paying special attention to its cash flow. From there, you can begin considering the principal loan amount, its associated interest rate, required monthly payments, and other loan terms such as penalties and service fees to create a realistic plan for paying off your loan. If repaying the loan as originally scheduled seems unrealistic, get advice from a financial consultant and consider renegotiating the terms of your loan.

2. Prioritize Loan Payments

Loan payments should always be your business’s top financial priority. The failure to meet your financial obligations can result in you losing access to quality funding and endanger your business’s ability to take advantage of market opportunities.

To ensure that business banking loanpayments get the attention they deserve, have your finance team allocate funds from your business income to cover them before other expenses. This ensures that you consistently meet your critical repayment obligations.

3. Set Up Automatic Payments

Consider setting up automatic loan payments with your bank or lender. This reduces the risk of missing payments due to forgetfulness or busy schedules and can sometimes gain you better interest rates over time. 

While automatic payments aren’t always easy to set up, some financial institutions make this easy. For example, the Philippine-based fintech Maya Business enables simple automatic payments for its Flexi Loan product on Maya Business Manager, allowing borrowers to forget about manually managing their loans and focus on growing their business. 

4. Designate Loan Payments as Fixed Costs on Your Budget

Using your repayment plan as a framework, create an operating budget that accounts for all your business expenses and includes loan payments as fixed rather than variable costs. Having your loan payables visible alongside your other expenses on your budget should also give you opportunities to identify areas for cost savings.

5. Increase Your Income

Explore ways to boost your business’s income, such as increasing sales, offering new products or services, or diversifying your revenue streams. You can gain some extra revenue by cost-optimizing your processes and finding new suppliers that offer your needed inputs at better prices. This extra income will come in handy for making advanced loan payments and pulling your final payoff date forward.

6. Avoid Late Payments

Missing loan payments can result in penalties and damage your credit score, making your future loan repayments even more challenging. Aside from setting up automatic payments, set reminders a few weeks in advance of the due dates so that, in case of an expected shortfall, you have adequate time to explore more options and preserve your financial track record.

7. Round Up Payments

Consider rounding up your monthly payments to the nearest hundred or another convenient amount. This slightly larger payment can help you pay down the principal faster, reducing the overall interest paid.

8. Use Windfalls Wisely

If your business receives unexpected windfalls, such as a tax refund or a large customer payment, don’t use it to treat yourself with luxuries. Instead, consider using a portion of this money to make extra loan payments. Alternatively, you can reinvest the windfall into improving your production processes to reduce your overhead and increase your savings. Either of these strategies can significantly reduce the overall burden of loan repayments.

9. Explore Refinancing

If you find an opportunity to secure a lower interest rate, explore it. Refinancing can reduce your monthly payments and save on interest costs. Some lenders will be happy to give you special consideration if you’re able to make your payments consistently.

10. Seek Professional Advice

Unprepared business owners can get confused by their loan contracts and unwittingly find themselves trapped in never-ending payment cycles. If you’re not familiar with the legal frameworks that support business loans in the Philippines, you should consider getting advice from qualified legal and finance experts. Having advice from qualified experts can go a long way in helping you navigate any business loan Philippines has to offer.

Successfully paying off your first business loan can show creditors and investors that you and your business are worth their risk. You’ll not only demonstrate your ability to effectively manage business debt but also your commitment to sound financial management. By following these tips consistently, you’ll eventually build your reputation and credit, gaining access to new funding opportunities that wouldn’t be available otherwise.