When your company needs a business loan, determining the right amount to borrow is critical. Asking for too little can hinder your ability to fund your business, while requesting too much may raise doubts about your ability to repay the loan. To obtain financing for your business, you must consider several factors. Here are some essential things to keep in mind:
- Determine the exact amount of money your business needs.
Create detailed cost projections for the use of borrowed funds, prepare financial projections, including profit and loss and cash flow statements. Doing this will not only help you determine the amount of money that you need, but it will also show lenders that you are responsible and well-informed.
- Evaluate your business’s ability to make loan payments.
Ensuring that you can make loan payments is crucial. Lenders assess your company’s ability to pay back the loan within a given year, which they call debt service coverage ratio (DSCR). To calculate your DSCR, you need to know your cash flow, i.e., how much money comes in and goes out, and the money you will have left to make debt payments. Lenders also consider the borrower’s personal finances, using the debt-to-income ratio (DTI), which calculates total monthly income and monthly debt, including car payments, mortgage payments, credit cards, and other debts. Most lenders prefer that borrowers’ personal debt should not exceed 36% of monthly income.
- Consider the costs of your business loan.
Closing costs, interest rates, and total amount to payback are crucial factors when considering how much you can and should borrow. Knowing the total costs of a loan will inform you about the type and amount of financing that you should pursue.
- Analyze the impact of your loan on your projections.
Consider how the influx of money will influence future revenue projections. How much profit can you expect to make by taking out a loan after factoring in the loan’s costs? Calculating this can help you determine the optimal amount to borrow.
- Plan for future financing needs.
If your business plan calls for future expansion that requires financing, consider how taking out a smaller loan now and repaying it can help you build your credit to secure a larger loan in the future. Also, determine whether it’s necessary to take out a loan now to reach the point where you can meet your plans for future expansion. By planning ahead, you can make informed decisions about financing your business now and into the future.
To help you gauge the level of financing you need and compare loan types from many lenders, use Advance American Funding’s small business loan calculators. With their free online tools, you can quickly determine your financing needs, review your eligibility, and explore the best loan options for your business. By carefully considering these factors, you can make confident decisions and secure the financing you need to take your business to the next level!