Managing Debt: Strategies for Repaying Your Business Loan

2. Prepayment

Prepayment refers to paying off part or all of a loan before its due date. Making prepayments on your business loan can help you repay the loan faster and reduce the overall interest cost. When you make a prepayment, you reduce the outstanding loan amount; as a result, the interest calculation is on a lower loan amount, which ultimately reduces the total interest payable. 
 
For example, let's say you have a business loan of Rs 5,00,000 with an interest rate of 12% per annum and a loan tenure of 5 years. If you make a prepayment of Rs 1,00,000 after the first year, your outstanding loan amount will reduce to Rs 4,00,000, and your interest cost will also decrease. As a result, you can repay your loan faster and save on interest costs.

3. Improve Cash Flow

A positive cash flow also gives you more debt management options, such as paying off smaller debts first or making extra payments to reduce interest costs. However, if your cash flow is negative, you are more likely to default. Assume you borrowed Rs 25,00,000, and your EMI is around Rs 1,00,000. However, the total cash inflow your company can generate is only Rs 1,10,000. It is impossible to manage debt and business-related expenses simultaneously in this situation.

However, you can improve your cash flow by combining short-term and long-term strategies. In the short term, you can improve cash flow by reducing expenses, negotiating better payment terms with suppliers, and collecting dues from your customers more quickly. Additionally, you can increase revenue by selling unused inventories on the shelves, offering promotions, or expanding the customer base. In the long term, a business can improve cash flow by implementing financial planning and forecasting, diversifying revenue streams, and improving operational efficiency. Also Read: Have you tried these 11 ways to improve cash flow in your business

4. Refinancing

Refinancing is a debt management tool that allows you to pay off existing debts by taking out a new loan with more favourable terms. By refinancing, you can potentially lower your monthly payments, reduce the interest rate you pay on your debts, or extend the repayment period, which can help you better manage your debt.
 
For example, let's say you have several outstanding debts in the name of your business that you are struggling to pay off. By refinancing, you could take out a low-interest term business loan and use the funds to pay off the rest of the loan. By doing so, you will only have to make one monthly payment instead of multiple payments to various creditors, which can simplify the debt repayment process. 

How Can You Negotiate Better Repayment Terms with Your Business Lender?

Negotiating with a lender for a better repayment term is another way if you are wondering how to manage debt. Here are some steps to consider when negotiating better repayment terms with your lender:

• Prepare a comprehensive understanding of your income, expenses, and debts to make a strong case for better repayment terms.
• Explore what other lenders are offering for comparable loans, and be prepared to demonstrate why it is in your lender's best interest to provide better terms.
• Describe your ongoing financial situation and why you cannot meet your current obligations. Demonstrate to your lender that you accept responsibility and are committed to repaying the debt.
• Propose a revised payment plan that you can afford. Provide clear details of how you will repay the debt over a longer period or at a lower interest rate.
• Understand the lender's position and what they can realistically offer. Be open to finding a mutually beneficial solution that works for both parties.

 Also Read: Growth Strategies for Small Businesses

Conclusion

Managing business debt can be difficult, but with the right approach and strategy, it is possible to repay your loan and improve your financial stability. Whether you choose to focus on reducing expenses, negotiating better repayment terms with your lender, or developing a budget, the key is to take action and stick to your plan. Remember that there is no one-size-fits-all solution to debt management; you must weigh all of your options.