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9 Steps That Help You to Pay Back a Small Business Loan

Written by Banks Editorial Team

Updated April 16, 2024​

4 min. read​

Finding the right small business loan is a big step in the establishment and evolution of your business. Once you’ve fulfilled all the application requirements, it can seem like all the hard work is done. However, your financial obligations are just beginning, and one misstep can have devastating consequences. With your funding in hand, it is essential to know how to pay back your small business loan.

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How to Pay Back Your Small Business Loan

After you obtain financing, there are several ways to pay back your small business loan. Be sure to understand your loan terms, make payments on time, and find ways to reduce your costs through tax write-offs, accelerated repayment, and refinancing. Like personal loans, late and missed installments when paying off business loans can significantly affect your credit score. With business loans, however, the consequences can be much worse, compromising not only your business and personal creditworthiness but your reputation as a business. Fortunately, you can easily manage your business debt by following these nine failsafe steps to pay off a business loan.

1. Look through the Loan Terms Once More

The first step in paying off your business loans is understanding the repayment terms in full. This may seem like basic knowledge, but it can be easy to overlook or forget repayment terms once you’ve finally completed the application process. Take the time to write down the primary facts you will need to know to ensure on-time repayment. Be sure to make a note of the following:

  • Loan Principal Amount
  • Loan Interest Rate
  • Length of Loan Term
  • Repayment Schedule
  • Early Repayment Penalties
  • Lender’s Contact Information

Keep all of this information readily available in an easy-to-access location, so you can find it when you have questions about your loan terms.

2. Know Your Repayment Plan

When paying off business loans, you must know your repayment plan. You will typically receive a payment schedule from the lender, providing payment dates for the agreed schedule. Some lenders offer monthly repayment terms, while others may request weekly or even daily payments. Understanding your loan payment schedule is critical to ensuring that your payments are made in full and on time. In addition to your payment schedule, you should be aware of any variable interest rates, payoff amounts, and whether there are prepayment penalties or fees.

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3. Set up Autopay and Payment Reminders

To keep your loan in good standing, it is essential to pay on time. Set up payment reminders in your calendar or accounting system to always know when your payment is due. It is especially critical to monitor your payment schedule for shorter-term payment plans, such as daily or weekly payments.

If your lender offers the option, automatic payment or autopay, it can help you make payments on time. The lender will automatically remove the amount from your account on the scheduled date, simplifying your accounting. You should still schedule a reminder to make sure you always have the necessary funds available in your account.

4. Create an Amortization Schedule

An amortization schedule can help you plan and track your repayments. It allows you to see how each of your payments is applied against interest and principal amounts. You can plan for additional payments and early payoffs and compare overall interest costs to payoff penalties. Finally, an amortization schedule allows you to track how much each amount goes to interest versus principle, which can help you get extra deductions to come tax season.

5. Check if Your Loan is Tax-Deductible

Some small business loans are eligible for tax deductions on interest payments. If qualified, you can claim deductions and decrease your business’s amount of taxes for that year. It is important to fully understand your loan terms and applicable tax codes to ensure that you make the correct deductions. You may be eligible for a tax deduction on business loan interest if:

  • You have a legal, signed lending agreement;
  • You plan to repay the debt in full and on time;
  • You have a defined borrower-creditor relationship with your lender;
  • Your lender is a legal, financial lender.

6. Opt for a Loan Prepayment Strategy

To save money, many small businesses will pay off their loan earlier with a prepayment strategy. Before you begin, be sure to check your lending agreement for prepayment penalties. Even though it can be tempting to pay your loan off early and save on interest charges, you may end up paying more in fees. There are several benefits to choosing this option, particularly for seasonal businesses and those with steady cash flow. Paying your loan off early frees up more cash flow and reduces your overall financial obligations; however, this is not an ideal strategy for financially strained or operating businesses below their budget.

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7. Refinance a Business Loan

It can be advantageous for business owners with outstanding loans to take out a small business refinance loan. Refinanced business loan rates are typically lower, which allows you to secure better payment terms tailored to your needs. With refinancing, you may be able to reduce interest rates, change payment frequency and amount, or eliminate prepayment penalties. Not all loans are eligible for refinancing, so be sure that you’ve checked the terms of your original loan. Overall, refinancing can be significant for reducing your immediate financial obligations to free up more working capital.

8. Check Your Credit

Good business credit is critical for your reputation and financial health. Many financial institutions require a personal guarantee, which means that you must personally repay the debt even in the event of bankruptcy. Poor repayment history on a business loan can affect your personal credit, resulting in difficulty obtaining personal financing. In short, if you’re wondering if you have to pay back small business loans, the answer is “yes.” This also applies to business credit cards and any other personal and business financing.

9. When in Trouble, Seek Help Immediately

If you are having trouble making loan payments, you must contact your lender as soon as possible. Depending on the circumstances, your lender may be able to suspend payments, assist with refinancing, or temporarily reduce your payment amount. The total amount owed on your loan will remain the same, but you may be able to reduce the financial pressure and allow you to ensure cash flow for your operation.

If your lender does not offer ways to reduce or otherwise mitigate payment terms, find ways to reduce your business costs and increase revenue. This will help you stay on good terms with your financial institution, and it will make your business more stable and successful in the long term.

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