At one point if you are starting a business you will have to take out a business loan, amounts all the questions that you should ask yourself the most important one is how much you can borrow. Where a lot of people go wrong is by taking a loan without thinking about if they can pay it back. It doesn’t matter if your business loan is long-term or short-term, you have to be ready for all the possible consequences. Taking out a load that is too large will disrupt your business cash flow and cause issues down the road. That is why before taking the leap you should always do your research and ensure that you are taking a safe and responsible route.
How To Decide On The Loan Amount
If you are a small business owner, there are a couple of reasons why you need to take out a loan. The working capital, inventory purchases as well as buying new equipment. First, you will need to calculate how much all those you need cost and then you can decide how much to take out.
What Is The Amount Of Money That You Require?
The best advice that anyone can give you is to take out a loan that is equal to the sum that you need. In most cases, the lender will tell you that he can offer you more than you are looking for, but you shouldn’t give in to the temptation. That is because if you have more cash on you the easier it is to miss spread it. Often the money will also go to non-essential things. To sum everything up you should always take out a loan that is exactly how much you need, no less not more.
Will You Be able to Repay The Loan?
The amount of money you have borrowed must be used to buy productive assets for your business. The cash flow from the assets that you have bought should be enough to repay the loan. If you have taken out a loan to buy inventory the sale of said inventory should be enough to both repay the loan and boost your profitability. As it is quite tricky to get the right number, make sure that you consult with a professional in order to find out what are the best secured loans for you.
Always Match Your Cash Flow
Always choose a loan period that is realistic. That means if you have purchased a capital asset for your business and it has a life of five years, always choose your loan term to match it. This way you will allow yourself to have enough cash flow and repay the borrowed amount rather than picking a short-term loan and then struggling to pay it back. Always choose your loans depending on how much cash flow you have in your business. That is why you should always be realistic rather than aiming high.
Find Out If You Are Eligible
Along with asking yourself how much you can borrow, you will also need to find out if you are even eligible to take out a loan. There are a few things that you need to know about the criteria of banks and other lenders that you and your business will have to meet in order to take out a loan.
- Credit limit
First, you will need to know your credit score because some lenders will have very strict and up-forward rules. If you have a credit score that is under a certain level you might not be eligible for the loan. In most places, if you have a credit score that is less than 650 you won’t be able to apply for a loan.
- How old is your company?
The second thing that plays a big role is the number of years your business has been in existence. Most places will loan money to those companies that have been in business for at least a year and some will even make it two or more. Along with that your yearly revenues also play a big part in making you eligible for a loan. You have to prove that your business is making a certain amount of money on a yearly basis in order to get a loan.
- Bank account cash and deposits
Another thing that plays a big role is the details that are found on your bank accounts such as your deposits and average balance.
Business Loans Final Thoughts
As you can see, how much you can take out is primarily based on your business’s annual sales, credit score as well as existing debt. Keep in mind that most places won’t lend you more than 30 percent of your business’s yearly revenue. Your company should always have a positive cash flow after you have counted all your debt payments.