How to manage high interest business loans

While high interest loans may be useful in the short term, they can become a significant financial burden and hinder the growth and profitability of the business if not managed correctly

For this article we spoke to Joe O’Connor, financial advisor and founder of The Transformer, about business loans.

A business might have to take on a high interest loan for several reasons, including a limited trading history, poor credit, or a need to access capital to plug a cashflow gap.

While high interest loans are useful for dealing with these situations, they can become a significant financial burden and hinder the growth and profitability of the business if not managed correctly.

In this article, we explain how to manage high interest business loans and what you can do to secure lower interest finance.

Managing high interest business loans

Here are some ways to manage your high interest loan.

Understand the loan

It’s vital that you understand the terms of your loan to properly manage repayments.

Joe O’Connor, financial adviser and founder of The Transformer, says there are four key elements that anyone exploring a business loan should understand, ‘you should know the true annual percentage rate (APR) of your loan, the remaining term, fees, and whether early repayments are penalised.’ Failing to get to grips with these terms and what they mean for you and your business could result in you being unable to pay the loan back.

Structure your repayments

Develop a repayment schedule that covers all the debt and aligns with your business’ cashflow cycle.

Automate your repayments to avoid forgetting to pay and consider making overpayments to settle the loan quicker.

‘Building a rolling 13-week cashflow forecast, ring-fencing VAT/PAYE from your cashflow, and redirecting business savings/surpluses from money set aside for subscriptions, merchant fees, and utilities into automated weekly overpayments can make a massive difference’ says Joe.

Improve cashflow

Improving cashflow can provide you with funds to pay off your debt quicker and more efficiently.

Find ways to increase sales, such as providing high-margin products or services, and expanding into new markets. 

Review your costs to look for savings. Examples are cancelling non-essential subscriptions, replacing travel with online meetings, and renegotiating with suppliers.

Consider selling assets, such as equipment and vehicles, that are no longer needed.

If suppliers are paying invoices late, focus on getting them to pay on time. You may want to offer a discount for settling invoices early.

Consolidate loans

If the debt becomes too much of a burden, there are ways to change the terms of the loan.

One option is debt consolidation which involves taking out a new longer term, lower interest loan and combining all high interest loans into one single repayment. This is easier to manage and can reduce the amount of interest you pay over time.

‘When considering consolidation, target a lower blended rate, zero or low exit penalties, and more headroom for change, not just a longer term’ says Joe. ‘Flexibility is paramount so you can overpay without penalties as trading improves.

‘Avoid mixing working-capital needs with long-life assets in one blunt instrument; consider a revolving facility for the former and a term loan for the latter. Enter each deal with your eyes wide open and be cautious about re-securitising previously unsecured debt against property.

‘Before accepting terms, run a 12-month stress test, such as forecasting whether by this time next year, will the interest paid be lower, principal repaid be higher, and cashflow headroom be stronger?’

Refinance the loan

Another option is refinancing which involves renegotiating to get a lower interest loan. A lender may be willing to do this if your business’ credit worthiness has improved since you took out the original loan.

Joe says ‘prepare a pack for your lender that makes underwriting easy: two or even three years of accounts, year to date management accounts, a 12-month cashflow, a clean debt schedule, and a clear use-of-funds breakdown. This can be extremely helpful for the lender and demonstrates that you are thinking ahead.

‘It is important to factor in both explicit and implicit fees, such as arrangement, valuation, legal, broker, exit, and compare the net position of staying vs switching. Choosing a structure that fits your circumstances, the asset life and cash flow cycle rather than stretching short-term working capital over too many years is critical.’

How to get lower interest loans

To access lower interest loans, there are several actions you can take.

Improve your credit score

A poor credit score is a common reason for only being able to access high interest loans, so work on improving it.

Not settling debts on time is an important factor, so pay all your bills, including supplier invoices, credit cards, and other loan repayments, on or before the due date.

Credit agencies may have incorrect information that is affecting your credit score. Get your credit reports from firms like Experian and Equifax to check for any errors.

‘Directors should also stay on the electoral roll, avoid clusters of hard credit searches, and reduce revolving balances below roughly a third of available credit,’ says Joe.

Build a stronger business case

Improving the performance of your business by increasing sales over the long term can derisk it for funders and give you access to lower interest loans. Steps to take include improving your sales team, reviewing your prices, and enhancing your sales strategy with techniques like developing accurate customer personas.

Accurate and up-to-date financials are crucial for accessing good value finance. Joe says your financial housekeeping should be ‘boringly excellent’.

He advises that companies should ‘file on time at Companies House, keep HMRC up to date, and maintain clean management information. This includes monthly profit and loss statements, a current business balance sheet, actual and cashflow forecast, and actively managing a debtor/creditor list.’

Provide collateral

Secured loans requiring collateral have lower interest than unsecured loans.

You could offer business assets, such as vehicles, equipment and property, as collateral.

Shop around

The business funding market is very competitive so you don’t need to accept the first loan you’re offered.

Compare different types of lenders (traditional banks, online banks, alternative lenders) and get multiple offers. Use that for negotiating the best deal with your preferred provider.

Latest articles