When deciding how to effectively manage your equipment loan, the key is to plan ahead. You want to not only plan your business budget, including repayment of your loan, but you also want to understand the decline and flow of your income. Ultimately, you need to make sure you have enough revenue to cover your loan repayments during all seasons of your business.
I also want to keep my lines of communication open with my lender. If you are still in good condition with your loan, if you encounter financial difficulties, your lender may be willing to work with you.
Learn 7 ways to manage your equipment loans and keep track of your loan repayments.
7 tips for managing your equipment loan
The best way to set up yourself for success is to understand that you are signing and never take it out more than you can afford to pay it back. Dive into seven ways to manage your equipment loan even in less than ideal situations.
1. Understand the amount of loans you can afford.
Before signing the dotted line, estimate the cost of your business loan so you can easily pay it back. First, determine how much you will need to buy your business.
Then use a business calculator to plug in your loan amount and estimated interest rate to see your monthly expenses. Add monthly costs to your budget to see if you can easily manage your loan repayments. Even in the late season of your business, consider whether you can still meet this monthly payment.
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2. Create business budgets and monitor revenues
Your business budget can provide you with a photo of how your loan repayments fit into your cash flow. Essentially, a business budget is a detailed list of all your revenues and expenses. This will help you make informed decisions about new obligations based on your financial performance. To make your equipment loan budget effective, you need to make sure your business brings a lot of income to cover your loan repayments.
If you haven’t started a business budget, take your time to create one as it may be necessary when applying for an equipment loan.
- Estimate your revenue. Collect data on past revenue. The more data you have, the more accurate your future predictions. Find seasonal trends or metrics your business is gaining or losing profitability. If you don’t have any past records, look at current sales and contracts for ideas and compare them to industry revenue averages.
- Number costs for items on sale. When selling products, you want to see how profitable your business is. Subtract the total cost of creating a product from revenue.
- Calculate the cost. All expenses including fixed costs, one-off or seasonal purchases, and variable costs that change from month to month will be listed on your budget sheet.
- Understand your ebitda. EBITDA is net income before interest, taxes, depreciation and amortization. This number includes all revenue streams, including dividends and interest paid minus operating expenses.
- Find your net profit. This allows you to calculate the amounts you will spend on interest, taxes, depreciation and amortization. Subtract that number from EBITDA to find net profit or loss.
3. Understand the loan agreement
Next, you need to understand how the loan works throughout the repayment process. Your lender should be a resource to monitor you the fees and terms of your business loan so that you know what is expected.
These general terms may be listed in your loan agreement.
4. Pay off your debts before you plan to do so.
If you have a season where your business has high profits, consider putting more on your equipment loan than your minimum payment. A higher payment will help you pay off your debts quickly and save you interest money in the long term.
But understand whether your lender will charge you a prepaid penalty, a fee to pay your loan early. In many cases, paying off your debt may still be worth it even if you have an upfront penalty.
However, if your business is usually late in the season, you may want to save extra money during the profitable season. After that, if your business is slow, you can use your savings to pay off your loan.
5. Avoid applying for new debts
Having multiple debts can make repayment management difficult, especially when revenues are declining or experiencing seasonal declines or flows. Instead, make sure your current debt helps your business make money before you take on the new debt.
If you need to undertake more debts, you can use the debt ratio to determine if you can handle the loan. However, don’t rely solely on these ratios. Consider whether the estimated loan repayments fit your budget before assuming your new debt.
- Debt Services Compensation Rate EBITDA or net operating profit measure divided by debt. Lenders like to see a DSCR of at least 1.25 when funding new loans.
- Debt to income ratio This indicates the percentage of revenue that is debt repayment. A DTI of 36% or less is considered a healthy level of debt in the business.
6. Build relationships with lenders
Maintaining a strong relationship with your lender can go a long way with future lending or in the event you encounter financial difficulties. Start by paying off your loan on time and setting up automated payments so you don’t accidentally miss your due dates.
If you are unable to pay off your payment, please let the lender know immediately. Your lender may be willing to move forward with plans to overcome your hardships. How to provide debt relief:
- Deferred payments. Your loan repayment will be suspended for a certain amount of time. This option works best if you are experiencing short gaps in revenue, but hopefully improve in the near future. Deferred payments will not affect your credit.
- Changed repayment terms. Lenders can modify existing contracts to extend repayment terms and lower repayments.
- Debt settlement. You will negotiate with your lender and pay less than the amount you lend. A settlement will have a major impact on your credit and your ability to obtain future loans.
7. Check your credits
To strengthen your ability to earn credits in the future, check your credit score regularly and find ways to improve your personal credit score. Many small business lenders rely on your personal FICO score to measure your creditworthiness.
Some lenders only offer loans to borrowers with excellent credit. However, some people relax their eligibility requirements as low as their 500 credit score.
Some lenders also use business credit scores calculated by three major credit departments: Dun & Bradstreet, Equifax and Experian. Business Credit Scores use a scale of zero to 100 (0-300 for FICO Small Business Scoring Services). It is evaluated based on factors such as payment history, credit history length, business size, and industry failure risk.
What happens if I don’t pay the equipment loan?
If time is tight and revenues are declining, there may be good reason why you cannot repay your equipment loan. If you missed your repayment, understand the process that will take place with your lender.
- delinquency. Delinquency occurs the moment you miss your first repayment. Your lender will notify you of your status and the amount required to restore your account to good condition, including deferred fees.
- Default. If you don’t make a few repayments in a row, the loan could be the default. A loan agreement is usually written after missing a 3-6 month payment when the loan is considered by default.
- acceleration. The lender can pay the full amount of the loan because you breach the terms of your loan agreement. acceleration.
- Seizing assets and collateral. The lender then pursues the assets to pay off. Lenders may seize collateral used to assist with the loan back, such as commercial goods purchased on loan.
- Personal assets seized. Also, many equipment loans require you to sign a personal guarantee. This is a statement that agrees to be personally liable for repayment. Signing a personal guarantee will allow the lender to chase your personal assets with the default on the loan.
Conclusion
Depending on your business and market conditions, you may encounter a variety of situations in the process of repaying your equipment loan. Financial difficulties can be avoided by budgeting your loan repayments and paying attention to your revenues and ensuring payments. You can also save money during profitable seasons and pay when things are slow. But remember, in the worst case scenario, you can discuss new repayment options with your lender.
