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Repaying your business loan and managing debt

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Business loans are often central to a small business's success. But if you take out a business loan, it’s vital to repay it on time. Failing to do so will make the loan more expensive and could even lead to your company's closure. Here’s what you need to know about managing business debt.

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How does a company pay back a loan?

When and how you repay a business loan should be made clear during the loan application and approval process. The main details you need to know are:

  • The loan amount or sum being borrowed

  • The total amount to be repaid

  • The loan term (how long you have to pay it back)

  • The repayment amount (and whether that can change)

  • The due date of the first repayment (and all further repayments)

  • The interest rate charged

  • Any other fees and charges you will have to pay

  • The penalties you’ll face if you do not pay

You’ll also need to consider how you want to make the repayments. 

Popular forms of payment for business loans include Direct Debits and standing orders because you don’t need to remember when a repayment is due.

Other types of business finance, such as invoice finance, have different repayment terms.

These unsecured and secured loans could help you grow your business, cover running costs or even fund a new company.

What happens if a business can’t pay back a loan?

One of the most important things to consider when taking out a business loan is whether you can pay it back according to the repayment terms set out in your contract. 

Missed loan repayments generally lead to financial penalties, such as administration fees and higher interest charges. 

So, taking on debt you can’t service will make things worse, not better.

Failing to stay up to date with your business loan repayment schedule will also damage your company’s credit score, as well as your own, making it harder to borrow money in the future. 

This is even more true if you default on the loan, which means failing to pay for between three and six months, depending on the lender’s terms and conditions.

In such cases, the borrower is often hit with a County Court Judgement (CCJ), which remains on the company’s credit record for the next six years.

At this point, secured loan providers are also within their rights to repossess the assets used as collateral for your loan.

If you provided a personal guarantee when applying for the loan, you could end up having to pay it off with your own money – even if that means selling your home, for example.

While limited companies have the protection of limited liability, which makes the company solely responsible for its own debts, some lenders ask directors to sign a personal guarantee as additional security or to provide equity.

That means they must continue to make repayments until the full amount is paid off – even if the company that took out the loan is no longer trading.

What should I do if I can’t repay a business loan?

If you become aware that you cannot meet your agreed-upon business loan repayment schedule, there are two potential courses of action.

The first one is to find the funds elsewhere. For example, you could sell a business asset or apply for emergency business funding. 

Options include taking out a short-term working capital loan and using invoice financing, which involves getting a cash advance on outstanding invoices for work you have done but for which you haven’t yet received payment.

Remember, though, that taking on more debt just means more repayments – especially as emergency business finance often comes with higher charges than a standard business loan.

Therefore, you might be better off trying the second course of action. This involves contacting your business loan provider to discuss your options. Cash flow problems are common, and chasing companies that default on their loans is expensive and time-consuming for credit providers. So, you may find you can arrange a short repayment holiday or a longer-term loan with lower repayments to help you get back on track.

What is the typical term on a business loan?

Business loans come in all shapes and sizes and can run from a matter of weeks to 25 years or more. 

The right term for your business loan will depend on both how much you want to borrow and why you need the money.

Borrowing over a longer term helps to keep repayment levels down but means paying interest for longer. Short-term borrowing, meanwhile, usually involves paying a higher interest rate or fee in return for speedy access to the cash.

The term of your business loan may also be linked to the lifespan of a particular asset, such as a car or a van

Can you pay off a business loan early?

It depends. Some business loans can be repaid in full at any time without penalty. 

But most require you to stick to the repayment terms agreed at the outset, which is another reason to check them carefully before taking out a business loan.

If you want to pay off a business loan before the agreed-upon term, it’s crucial to contact your lender first to find out how much it will cost.

Depending on the size of the penalty, it may be worth continuing to pay off the loan as agreed and redirecting the capital you have at your disposal to another part of the business instead.

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