Top Tips for Managing a Startup Business Loan

Good news if your business qualifies for a startup loan. They’re a great way to increase cash flow and cover the high costs that can come with expanding. But before you borrow or even apply for debt, you need to know how to handle a startup business loan and what happens if you can’t repay it.

5 Tips for Dealing with Startup Business Loans

Small business startup loans are similar to other forms of business financing. When thinking about how to deal with a startup business loan, focus on making payments on time so you can pay off the debt as quickly and easily as possible.

1. Prioritize loan payments in your budget

Paying off your debt needs to be a priority. Create a budget based on your monthly payments for your startup business loan. Even if you need to cut costs elsewhere, don’t let yourself fall behind. Ultimately, the loan will improve your credit score, making it easier for you to borrow more in the future.

2. Sign up for automatic payments

If you’re looking for a way to make managing your startup business loans as easy as possible, turn on autopay. If you have regular cash flow, autopay is one of the best ways to keep your loans up to date. These payments are debited directly from your business bank account, so it’s one less bill to pay manually each month.

You’ll still need to make sure the payment goes through, but it should still save you time overall. And assuming there are always enough funds in the account to cover the loan payments, your business can avoid late payments and fees.

3. Avoid taking on additional debt

Start-up loans can be a valuable infusion of capital for a new business. But don’t borrow more than your business can reasonably repay. Additional debt, even if small, can pose a risk to your startup budget, so only take on one debt at a time. A low debt service coverage ratio (DSCR) puts your company in a better position if you need to borrow money for future expansion or unexpected costs.

4. Set aside extra money to make payments

While you may need to fund a new project or hire a new employee to grow, excess income can be put to good use by paying off your loan. If you experience seasonal sales increases, even one or two extra payments can make a big difference in the interest your business pays over the life of your start-up loan.

Use our business loan calculator to decide if this route makes sense. Also, check your loan agreement for prepayment penalties, which could make this option more expensive than it saves.

5. Get in touch with your lender

Stay in touch with your lender, especially if you borrow through a bank. Direct communication is key to resolving any issues. A lender who understands your business and how it operates may be able to restructure your loan, defer payments or help you develop a debt consolidation strategy if you have trouble making payments in the future.

What happens if you don’t repay a business startup loan?

The consequences of defaulting, i.e. not being able to repay a loan, can affect both your business and your personal finances. Avoiding defaulting on payments is always important, but especially during the startup stage.

As startup loans usually require personal guarantees, this will not only affect your business credit score, but also your personal credit score. The lender may file a lawsuit seeking your personal assets to cover losses. And the lender will seize any collateral you provided. So before seeking financing for your business, find out how startup business loans are handled and speak to a financial advisor if you need extra help.

Bottom Line

Before you take out a loan, plan how you’ll repay and how you’ll handle contingencies if things go wrong. And if you had a high interest rate on your start-up business loan, consider refinancing once your credit score improves and your business grows to reduce your monthly costs. If you’re still in the loan-hunting stage, explore your options with multiple lenders to make the best decision.