Since the financial crash of 2008, banks have tightened their lending criteria considerably, so getting a small business loan can be an achievement in itself.
But that’s not the end of the process: having received the funds you wanted, it’s vital that you manage and disburse them correctly if you are to benefit fully from the injection of capital.
So, what are the next steps you should take?
1 Separate the money from your other income
Unless you’re borrowing to smooth over a cash flow crisis, you should immediately transfer the money to a separate bank account. Otherwise, it’s all too easy to spend it on operational expenses, meaning that the marketing campaign you borrowed to fund won’t happen or the key new piece of equipment you wanted will remain unbought.
2 Set up your repayments
The most important thing with any loan is to pay it back on time and in full: fail to do so and you will damage your credit score, making it much more difficult to borrow in future. The best thing to do is set up a direct debit from your account so that payments cannot be missed and late payment penalties cannot be levied.
Of course, that’s only half the battle: it’s vital that you have sufficient money in your account to make the payments, so you should immediately input any new information into your cash flow forecast, making sure that you remain in the black and making rapid adjustments if you spot potential problems.
3 Make sure you continue adhering to your budget
When you’ve had a sudden injection of cash, there’s a huge temptation to relax your fiscal control over the business. Make sure you resist. A substantial loan will certainly make your life easier, but that’s no excuse to overspend or waste the cash you’ve borrowed.
You should always be alert to opportunities to save some money. Moving to smaller, cheaper premises if you have space you don’t use, switching telecommunications providers, not replacing certain personnel if they leave, and so on.
4 Ensure that you’re using the money constructively
Taking out a small business loan can deliver a step change to your company. The cash you now have on hand could enable you to launch the marketing campaign that will take you to the next level or invest in more prestigious premises, purchase cutting-edge equipment or hire talented people with great track records. Use the money wisely and it could repay dividends.
5 Confirm whether you can pay back the loan early
Chances are you will have investigated your options for early repayment when you negotiated the loan. Some loans allow penalty-free early repayment, enabling you to save a small fortune in interest, whilst others contain such a sting in the tail that there’s little point in considering the move.
The former type of loan is obviously advantageous, and if you’re lucky enough to secure one then you should be cutting costs to facilitate an early payback.
6 Keep a close eye on your credit score
Once you’ve had your new loan for a while and have made several repayments, you should be sure to check your credit score.
Assuming your lender has reported your timely payments to the major credit bureaux, your score should have increased, which will open up a number of other options to you. Of course, if you start making payments late or missing them altogether, the effect on your credit score will be disastrous.
7 Consider refinancing to save money
Getting a small business loan may be a milestone, but the financial landscape is constantly changing. Improve your credit score, and you may well find it’s now possible to borrow more for far less.
Keep an eye on all your borrowing – term loans, overdrafts, lines of credit, merchant cash advances – as you could consolidate your debts into a single monthly payment with a far lower interest rate. In fact, the more you prove that you’re a responsible borrower, the less it should cost you to borrow.
8 Monitor your financial position closely
Whenever most businesses borrow, it’s with the honest intention of paying the money back on time and in full. However, circumstances can change quickly, and it’s entirely possible that a sudden downturn in business or the collapse of a major customer could leave you struggling to make your payments.
It’s therefore vital that you monitor your finances regularly, paying particularattention to your cash flow. If you think you’ll have difficulty making a payment, make every effort to restructure your finances or take out some short-term borrowing to get yourself over the cash flow hurdle.
9 Talk to your lender if you’re in trouble
The worst thing to do if you’re struggling financially is to ignore the problem and hope it goes away. If you start missing payments without any explanation to your lender, the response will be harsh: you’ll start getting chased for payment, be landed with financial penalties and additional interest, and if the problem remains unresolved will find yourself taken to court.
If, however, you are upfront and honest with your lender, there is every chance that they will work with you. You may find yourself able to negotiate a longer term, thus reducing your monthly outgoings, or receive a moratorium on compound interest; your lender might even allow you to take a payment holiday whilst you get the business back on its feet.
10 Remember that your loan can work for good or ill
Spend your loan wisely for its intended purpose and keep your cash flow in check, and you could find yourself joining the major players in your industry.
On the other hand, if you fritter the money on everyday expenses or release your iron grip on your finances, you could find yourself exactly where you started, only with higher monthly outgoings. In a worst-case scenario, your small business loan could be the catalyst that collapses the business so never borrow more than you reasonably think you can repay.
In summary, before you borrow you should have a clear idea of how much you need, a clear purpose for the money, and the confidence that you will be able to meet the repayments even if your cash flow suddenly worsens.
Equally importantly, you should be prepared to negotiate to find the best deal in terms of both interest rates and flexibility. Having borrowed, you should use the cash for its intended purpose and control your cash flow more tightly than ever before. Because if you get the fundamentals right, your business could grow beyond your wildest dreams.