Starting a business almost always involves acquiring capital and/or operating funds through some type of loan. You may also need business loans after the company is in operation. Depending on the status and terms of your business loan, you may be thinking about ways to pay off the loan on a faster schedule. If you pay off the loan early, you will usually avoid accruing interest over the life of the loan. Happily, you have options when it comes to paying off a business loan quickly.
Refinance Your Loan
One of the best methods for paying down your loan more quickly is by refinancing. Contrary to popular misconception, this refinancing is actually a new loan that pays off the original loan. This new loan can be with the original lender or a new one. A bank may offer a refinancing loan for a term between 1 and 10 years but typically has stricter requirements. A Small Business Administration loan has easier qualifications for a term between 7 and 25 years but may not be available if you have an existing SBA loan. Before applying for a refinancing loan, be sure that your savings costs over the new term length outweigh the upfront servicing fees, such as the closing costs.
Reduce Lead Time
When a bank or another financial institution is considering giving you a business loan, they will be looking at issues pertinent to your company. While most details have to do with items like credit and payment history, collateral, business income, industry sector outlooks, et cetera, your actual business processes may also be considered during the evaluation. Lead time is the time that elapses between the placement of an order and the shipment of the required order products, and reducing these numbers is important before applying for a new business loan. Be advised that all activities add to lead time. Whether wasteful or not, any activities involved in your order processes need to be lessened as an indicator of good business management.
Besides refinancing, you can also consider consolidating multiple loans into a single loan with shorter terms and lower interest in order to pay off debt more quickly. However, if any of your existing loans have prepayment penalties, you need to consider the offset between the fees and your overall savings. Most business loans with a bank will not exact these penalties, but an SBA loan will impose graduated penalty percentages that depend on the length of the remaining term.
Possessing debt can be good or bad depending on the circumstances of your business and the type of debts you have. Usually, though, any savings you can manage through paying off your business loan early is a good way to save money over the long term. If you have not done so previously, sit down with your finance department or advisors and map a plan of action to pay down your debt.
For more information about the loans to take out for your business, read on here!