Getting approved for a loan is a hugely exciting experience, but even more thrilling is actually receiving the money. With cash in hand, you might feel like rushing to make those purchases or improvements you’ve been dreaming about, but it’s best to handle the money carefully.
Here we’ll help you understand what you can expect after you’ve received your loan, and what you can do to make the best of it.
Use the Money on What You Intended
Most business owners apply for a loan because they have a particular need or project in mind, for example, purchasing more inventory, buying real estate, or investing in marketing. But when the money shows up, you may be tempted to use it for other things, like paying off bills.
According to Diana Golopenta, Manager of Lending for Accion East, it’s important to use your loan on what you originally intended. “We give a business a loan so that they can grow, and based on the intended use of the loan, we’re able to project growth,” says Diana. “When a business then comes back having used the money as intended, we’ll be able to offer them other loans because they can show that the business is growing and that their financials are in better shape than before.”
Don’t Be Too Risky
Let’s say you want to buy a new truck for your business with a loan. You figured out the projections, applied for a loan, and were approved for a larger amount than you expected. You might be thinking, “With this extra money, I could buy a better truck than I thought!” Think again; it’s important not to be too risky.
The loan was given to you based on your original projections, and you should be careful not to invest in more than you can actually afford. Additionally, spending the money based on your original projections will allow you to go back and see if they worked out. “And a positive performance can help a business get future loans,” says Diana.
Keep Track of Purchases Made With Your Loan Money
Keeping track of all purchases made with your loan will allow you to do a comparative analysis of the months before and after you spent the money. For example, if you invest in a new website for your online business, you’ll be able to track sales from before and after the website purchase.
While you might be tempted to leave the bookkeeping to your accountant, Accion encourages clients to use Quickbooks or some other kind of accounting software. “A financial tracking program allows you to keep clear records of monthly or weekly purchases and sales,” says Diana. “This makes it easier to do a comparative analysis with periods prior to loan funding.”
Organize Your Finances to Accommodate for Your Monthly Payments
With extra cash in your pocket, you may have a newfound sense of financial security. But don’t forget that your first loan payment is right around the corner, and you should begin organizing your finances to accommodate the monthly expense.
Your monthly payment is based on the amount you borrowed plus the interest rate calculated by your lender. Additionally, some loans carry monthly service charges to cover administrative costs (these charges are most common with loans for mortgages).
It’s a good idea to set aside a couple of monthly payments to avoid falling behind, especially if you want to build a good relationship with the lender.
Keep Cash on Hand
Once you receive your loan, you’ll want to arrange your financials to ensure that you always have cash on hand—meaning, a positive end of month balance in your business bank accounts. This is important not only for making monthly loan payments, but also in the event that you need access to a cash reserve.
For example, some businesses are seasonal and need cash to get through slow seasons. Other small businesses might only have two or three clients, and if they lose one, a cash surplus can keep the operation going while new business is acquired. Unexpected situations can arise with even the best planning, so it’s always good to be prepared.
Be Wary of Paying Off Your Loan Early
You may be thinking that one way to manage your monthly payments is not to have them, either by paying off the loan early or making larger payments than the required minimum.
Before making this your plan, you’ll first want to make sure that you won’t be charged a prepayment penalty fee, something that some lenders charge to ensure that they receive the full amount they planned on when they offered you the loan. This fee is often referred to as a “make whole premium.”
Of course, not all lenders charge prepayment penalty fees; Accion doesn’t. In these cases, paying off your loan early could save you a lot of money in monthly interest charges. Just be sure that you have enough cash on hand to keep a positive bank balance after paying the lump sum.
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