6 things to keep in mind after taking a loans
Getting a business loan is one of the major milestones in a business owner’s journey as a lot of time is spent on the preparation and application of the loan.
The required flow of funds enables the business to fulfil its expansion goals, including growing its operations, increasing existing lines of products and services, hiring skilled workforce and upgrading machinery, etc.
That said, even as the inflow of capital opens the doors for crucial business activities to come to life, it comes with a major responsibility- that of repaying the loan.
Business owners have to deal with loan repayments prudently to run their operations smoothly, maintain relationships with lenders for future requirements and avoid debt.
Here are a few ways to help businesses chalk out a repayment plan.
1. Draft a loan repayment plan: Once business owners have their financials and budgets sorted, they should put together a loan repayment plan, set aside funds every month, try to pay more during a busy season and even attempt paying-off the entire loan before the maturity date.
2. Prepare a budget: Loans are surely an added lifeline helping in the growth and running of a business, but, if not managed properly, they can soon turn into a debt trap. In order to ensure the loans are managed viably, business owners need to create a budget that keeps a check on unnecessary expenditure, and does not deviate from the original plan of expansion, among other crucial steps.
3. Use the loan amount carefully: What business owners do with their business loans can affect their borrowing in the future. Lenders keep a tab on how business owners utilise the credit amount. Hence, business owners should ideally stick to the plan and focus on using the funds carefully. It assures the lender of timely repayment of the loan as well as creates the understanding that the funds were utilised effectively. This understanding is crucial to a business’ future prospects of accessing further credit.
4. Avoid late payments: The repercussions of late loan repayments can severely affect a business’ future growth prospects, especially when it includes accessing more credit from financial institutions. It not only adversely impacts the owner’s relationship with the lender, but can also affect the business’ CIBIL Rank and Company Credit Report (CCR). Whenever a business misses its monthly loan repayment instalment, it is reflected on the CCR, which can also hamper the CIBIL Rank. A low rank and bad report can hurt loan prospects in the future too. To avoid such a situation, business owners can opt for the auto-pay option, allowing for the loan amount to get deducted automatically from the business’ bank account every month on the date set by the lender. This option ensures EMIs are paid on-time, a crucial factor for future loan prospects of a business.
5. Monitor CIBIL Rank and Company Credit Report (CCR): One of the key factors considered by financial institutions before lending to businesses is their credit history. The Company Credit Report (CCR) is a record of a business’ credit history, based on data submitted to CIBIL by lending institutions. The CIBIL Rank and CCR gives lenders unbiased insights about the business’ credit behaviour to evaluate the business more objectively. On-time payments of monthly loan instalments can impact the CIBIL Rank positively, which may lead to lenders approving loans faster and reducing interest rates for future requirements. This is why it is crucial for businesses to monitor their CIBIL Rank and CCR to avail loans in the future without any hassle.
6. Consider refinancing options: In case of a higher than expected rate of interest, business owners can look at loan refinancing to increase the loan tenure, avail better rates and loan terms. This option can help during low sales or unplanned expenditure.
While acquiring a business loan may seem like a daunting task, repaying the loan on time is even more critical in order to make sure the business keeps growing. A default on loan repayment can seriously jeopardise future growth prospects.
Thus, all business owners should ensure timely repayment of loans in order to keep the growth plans intact.