How To Manage A Startup Business Loan

10’000 Hours/Getty Images: Illustration by Issiah Davis/Bankrate

Startup business loans are excellent ways to increase cash flow and cover the big expenses that might arise as you expand. It’s good news for your business if you qualify to receive a startup loan. But before you take on any debt — or even submit an application — know how you will manage your loan repayments so that you can fully repay the loan on schedule.

5 tips for managing a startup business loan

To effectively manage your startup business loan, use these strategies to help you make loan repayments regularly and on time.

1. Prioritize loan payments in your budget

Clearing debt should be the priority as you move forward. Get started by shaping your budget around the monthly payment for your startup business loan. Add the loan repayment to your budget, and if your revenue dips during slow seasons, prioritize cutting expenses other than the loan. You want to avoid falling behind on loan repayment at all costs. Ultimately, your loan will build your business credit score and make it easier to borrow more in the future.

2. Sign up for automatic payments

If you have regular cash flow in your business, setting up automatic payments is one of the best ways to manage your startup business loan. Since these payments get deducted directly from your business bank account, you won’t have to worry about keeping track of the due date and paying the loan manually. Provided you always have enough in your account to cover the repayment, you’ll avoid late payments and fees by using autopay.

3. Avoid taking on additional debts

Business startup loans can be a valuable cash infusion for new businesses. But you should never borrow more than your business can reasonably afford to repay. Even small additional debts can be a risk that strains a startup’s budget, so only take on one debt at a time if you can. A low debt-service coverage ratio (DSCR) as a business will put you in a better position if you need to borrow for expansion or unforeseen costs in the future.

4. Put extra cash toward payments

If you have a few unusually successful months and are wondering what to do with the extra money, you could use it to pay off your loan. If you see a seasonal increase in revenue, even one or two extra payments can make a big difference in the amount your business pays in interest over the life of the startup business loan.

However, check your loan agreement for prepayment penalties that could make this route cost more than it saves. A prepayment penalty is a fee that lenders charge when a business owner pays off the loan early. If the lender charges this fee, make sure that you save more in interest than the fee costs in order to make early payoff worth it.

5. Communicate with your lender

Stay in contact with your lender, especially if your revenue dips and you think you might miss one or more payments. Direct communication is key to working through problems. A lender that knows your business and its operations may take these steps to work with you:

• Deferred payments or forbearance: Allows your business to miss one or more payments temporarily until your business can make payments again
• Restructure your loan: Your lender may extend the loan terms or refinance your loan to lower the payments, helping you meet the required payment amount
• Debt settlement: This option allows you to pay off less than the total loan amount owed, but it significantly impacts your credit
• Debt consolidation: If you have multiple loans and are struggling to make all the minimum payments, you can consolidate your debt into one loan

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

If you miss a repayment, the lender will consider your loan delinquent, though it may take no action to recoup the loan at this point. If you miss two or more repayments, the lender may then consider your loan in default. The lender can legally require you to repay the full loan amount immediately, and it may seize collateral and business assets to repay the loan.

The consequences of default — being unable to pay your loan — can affect both your business and personal finances. Avoiding default is always important but especially critical in the startup phase.

Since startup loans typically require a personal guarantee, your personal credit score will be impacted alongside your business credit. The lender could also sue you for your personal assets to cover their losses. So before you take out any financing for your company, make sure you know how to manage a startup business loan and consult a financial advisor if you need additional help.

The bottom line

Before taking on any debt, make a plan for how you will repay it, starting with adding the loan repayment to your budget. Then, consider what you will do if your business experiences slow seasons or temporary dips in revenue. Plan how to cut expenses to make up the difference, prioritizing loan repayments at all costs. If you run into financial hardship, you’ll want to reach out to the lender to see if it will work with you on your payment schedule.

If you’re still in the phase of searching for a loan, consider multiple lender options to help you make the best decision.

Frequently asked questions

• Is it hard to get a startup business loan?

  Yes. Most traditional lending institutions want to see that you’ve been in business with consistent revenue for at least two years. But some newer online lenders will offer a startup business loan to a company that’s only been around for six months. Having a solid business plan and a good personal credit score can help you get the loan you need.

• Can I get a startup loan if I have bad credit?

  If you’re a startup with bad credit, you will be limited in which business loans you can get, but it is possible to get a loan. Some online lenders will work with borrowers with a credit score as low as 500, but these loans generally come with high interest rates.

  You can also explore microloans, including those backed by the Small Business Administration (SBA). And if you’re part of a minority group or an otherwise underserved community, minority depository institutions (MDIs) and community development financial institutions (CDFIs) might be able to help you.

• What credit score is needed to get a startup business loan?

  Generally, lending institutions want to see a credit score of at least 670. Even better credit will help you get access to loans with lower interest rates, longer repayment terms and fewer fees. However, some lenders will work with borrowers who have scores in the 500s, although scores of 600 and above are generally preferred.