Commercial Loan Repayment – Where Does It Come From?

Obviously from the money you make… I can hear you say. Granted, I’ll give you that, but let me raise you one. Do you budget for it? Yes, I said the “B” word. Nobody likes the “B” word when it comes to money made let alone business owners. What greater joy or feeling is there when you complete a sale and behold the money either in the cash register or bank account? Trust me, the joy of having earned money (includes passive income as well) for a product and / or service offered is pretty sweet. Then, the reality hits you… Wait a minute, I owe others before I can pay myself and truly enjoy this money. Or at least that’s the hope.

The reality of having a commercial loan from a repayment standpoint is pretty cut and dry. In addition to having to cover for everyday operating costs like utilities, taxes, and personnel from the business’s operating cash flow, you also have to concern yourself with making timely loan payments. Here’s a recommendation for “softening” yourself to this reality though: before obtaining a business loan, make sure you can afford the payments (whether monthly, quarterly, interest only, or a combination of the previous) in the worst case scenario. Similar to being overextended from a personal finance perspective (you owe more than what you can pay), there’s nothing worse than taking on business debt that you don’t have the ability to repay on time and based on the agreed upon terms. In the commercial credit world, you’re ability to repay on time and as agreed is known as CAPACITY. It’s one of the major C’s of credit.

Here’s another tip in increasing the probability of repayment of a commercial loan: understand how the loan will help your business to increase margins (Gross and Net). What I mean is that simply getting a business loan for the sake of getting one because you qualify is not the way to go. Instead, if you can not consistently obtain a greater return on the loan for the term of loan (by selling more at greater margins or even minimizing operating costs due to production efficiencies and / or economies of scale) than the rate of interest that you’re paying, don’t get more than what you can afford to repay. This also makes you aware and somewhat intentional of improving and perfecting the business’s revenue (includes sales and marketing) and operating models in order to maximize profit margins (Gross and Net).