At some point in time, every business reaches out to a bank in order to secure a long-term business loan. Whether the business needs money to grow and expand its operations or purchase the latest equipment, there can be many reasons why a business may need a long-term loan.
However, acquiring a business loan does not promise business survival or long-term growth because heavy interest payments can disrupt the entire game. A lack of planning can put the survival of your business at stake because making periodic interest payments as well as repaying the loan is definitely not a piece of cake.
Many businesses fail after a few years of acquiring a large loan-term loan, mainly due to their inability to pay it off. In order to make sure your business doesn’t fall in this category, let’s have a look at these 7 effective tips to survive with a long-term business loan.
1. Cut unnecessary spending
Managing business expenses is essential to ensuring the smooth progress and survival of your business. Firstly, begin by monitoring the existing costs of your business and consider how they can be reduced. For instance, if you are required to pay heavy shipping costs when sourcing raw materials from a distant supplier, consider purchasing from a local supplier instead. By reducing any unnecessary expenditure, you can increase profits.
Moreover, there’s always some room to cut back on operational expenses such as bills and utilities, or cleaning and office supplies. For example, electricity expenses can be reduced by turning off any lights, heating, and cooling when not in use. Reducing other expenses will result in savings, giving the business the money to cover long term businesses loans repayment and interest expense.
2. Manage your cash flow
Most businesses use long-term loans to expand and grow. Make sure you achieve this objective, despite the temporary strain interest payments are likely to put on your cash flows. You have to grow your business no matter what and managing your cash flow efficiently will allow you to achieve this goal.
Start by making cash flow forecasts showing how the loan is going to affect your cash flows. If you are going to earn additional revenue as a result of growth, incorporate that into your cash inflows. Also, account for the increase in cash outflows due to interest payments. The goal should be to prevent a cash shortfall as a result of the loan because this could risk the survival of the business. Consider whether the loan is an option the business can afford in the long run, or whether a plan B is needed.
3. Automate Payments
Running a business and taking care of all its affairs is not easy – there’s so much to look after and so many operations to handle. In such a situation, automating your payments can significantly reduce some of your burdens. This will ensure that the payment is deducted from your bank account automatically as soon as it is due, without being of any trouble to you.
After all, we all are humans and tend to forget things. But forgetting interest payments and repayments can be a costly mistake. The penalties for late payment can be significant for some loans.
4. Shop around for the best rates
When seeking a long-term loan, it is always a good idea to approach different banks and private lenders and see who is offering you the best deal. Each institution is likely to have several different loan options with varying interest rates and terms and conditions.
By taking your time to do your research, you can find the best rates, which can help you save a significant amount of over the life of the loan.
5. Try to pay off the loan early
Long-term loans are not simple; every loan comes with different terms and conditions as well as different interest rates. Some loans carry high-interest rates and hence, it’s always a good idea to get off them off your back as soon as possible to reduce the overall cost to the business over the life of the loan.
While it may seem difficult to pay off a loan earlier than you have to, you can save significant money in the process. Just make sure there are no penalties for early repayment before you sign the contract.
6. Make sure you understand the terms and conditions’
Most businesses are in a hurry when it comes to acquiring a loan. After all, who doesn’t want money quickly? However, it is very important to study the terms and conditions associated with the loan in detail before you sign the agreement in order to avoid any unpleasant surprises later on. Many business owners are too quick to say yes to a loan, only to realize a few months down the line that it was a big mistake.
Make sure you go through the due dates for payments, penalties for late payments, and any other charges so that you know what you are getting yourself into and can prepare accordingly.
7. Try not to extend the loan term
Some businesses try to extend the time period over which the loan is to be repaid, in an attempt to reduce the amount payable each month so that it is easier for the business to manage. However, this strategy will only increase your overall cost associated with the loan in the long term (i.e. more time means more interest). Thus, it is best avoided unless the business is in a really difficult financial situation. Some planning and discipline are all you need to effectively manage your long-term loan while keeping costs down.
The Final Verdict
Surviving long term business loans is nothing less than a challenge. It is a long-term commitment that requires a significant amount of thought and consideration in order to be beneficial to the business. By keeping these 7 tips in mind, you can make sure your business thrives as a result of the additional funds, instead of running into financial trouble.