Creating a payment schedule when you take out a small business loan helps you stay on track and manage your debt responsibly.
You want your business to be stronger at the end of the loan terms than at the start, but to achieve this, it’s necessary to know in advance how much, how often, and how long you’ll be dealing with debt.
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How Does Business Loan Repayment Work?
Your repayment schedule depends on the type of loan you get and the lender’s fee structure. Fully amortized loans, in which fixed monthly payments cover part of both the interest and principal, are the typical arrangement for traditional bank loans.
Most of each payment goes toward interest at the start of the loan, but as the remaining principal is reduced, so is the total amount of interest that needs to be paid. By the end of the terms, you’re paying mostly toward the principal until the loan is paid in full with the final payment.
Alternative lenders typically calculate loan fees using buy rates, meaning all fees are calculated up front and each payment covers both part of the fees and part of the principal throughout the terms of the loan. For example, if you borrowed $100,000 at a 1.2 factor rate, the total cost of your loan would be $120,000, which would be broken down into equal payments, usually made on a weekly or bi-weekly basis.
Some lenders require daily repayments; others have monthly payment options for qualifying businesses. With an alternative lender, it’s possible to manipulate these terms and arrive at a favorable solution, rather than being stuck with the provided terms.
Using a Business Loan Payment Calculator
The easiest way to work out a payment schedule is to use a business loan calculator. You can find one online, often right on the website of the lender to which you’re applying. These are useful for estimating loan payments based on the amount you want to borrow and your ideal term length and fees. If you already have a loan offer, you can input the exact numbers the lender quoted you to figure out how much you can expect to pay every week or every month.
To use a loan calculator, put in:
- Loan amount
- Terms in months or years
- Interest or factor rate
- Start date of the loan
- Origination fee (if any)
Use the results to work out the best way to handle loan repayment so that you stay on schedule and avoid the risk of defaulting.
Evaluate Your Business Budget
Prior to signing a loan agreement, look over your current business expenses, cash flow trends and income projections. Pay attention to patterns from previous years, including any times when sales tend to be slow. This will give you an idea of whether or not you can make the loan payments with your current budget or if adjustments are necessary.
You’ll likely find places where you can cut back on expenses to have more money to put toward loan payments. In fact, this is a great time to streamline your business budget and eliminate unnecessary costs. When your loan is paid off, you’ll have established habits that leave you with more money to invest in growth.
Rework your budget to incorporate these cost-saving measures along with your expected loan payments. Make sure you would still have enough left over to cover regular operating expenses after taking the loan, plus a buffer in case of emergencies. If you can’t comfortably fit payments into your budget, you may have to wait to get financing or try to find a better offer from a different lender.
Understanding the Repayment Process
Lenders each have their preferred way of collecting loan payments. Banks may offer several options, including mailing in a check, paying by debit or credit card or setting up automatic payments from your business checking account. Alternative lenders typically collect payments using the latter option, so you don’t have to worry about missing a payment.
However, when choosing a lender offering automatic payments, you need to make sure the money is available in your business bank account before the withdrawal date. If you don’t have the necessary funds, you’re likely to be charged a late fee and could also be subject to overdraft fees from your bank.
Ask lenders about their late payment penalties and whether any grace period is offered. You shouldn’t have to worry about this if you stick to your payment schedule, but it’s important to know the details in case cash flow drops unexpectedly or you experience an emergency.
Be Mindful of Prepayment Penalties
Some lenders penalize businesses for paying off loans early. These penalties are usually included in terms for loans on which interest is charged. If you prepay the principal, the lender doesn’t get the interest you’d otherwise have paid over the remaining term period, so they require a fee to make up the difference.
However, you might be able to benefit from early payment of loans without prepayment penalties in the terms. Even if loan fees are calculated using a fixed rate so that there is no savings on interest, getting out of debt sooner improves cash flow and strengthens your company’s financial situation so that you have a more favorable profile to show potential investors and future lenders.
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Discover Your Business Loan Repayment Options
It’s easier to create a payment schedule and stick to it when you work with a lender that understands your financial situation, your business needs and the cash flow nuances typical of your industry. Making timely loan payments gives a boost to your credit score and increases your chances of qualifying for larger loans should you require more funding at a later time.
The financing team at National Business Capital works with a network of over 75 different lenders to find a loan with favorable terms and rates for your business. Searching multiple options saves you the hassle of applying to multiple lenders and comparing offers on your own. Once you’ve been matched with the right loan, you can use this free spreadsheet to work out your repayment schedule.