Almost every business will have to borrow money at some point whether they are just starting out or they need money for growth. But debt is bad news for business and if you can’t keep it under control, all of your income will be eaten up by big repayments. That’s why it’s important to only borrow what you need and keep that figure as low as you possibly can. Unfortunately, a lot of businesses get into hot water because they don’t know how to determine their borrowing needs and they end up borrowing way more than they need. If your business is about to take out a loan, here’s how you can calculate your borrowing needs.
Consider The Return On Investment
Firstly, you need to consider the return on investment on the loan that you are taking out. For example, if you are taking out a loan to grow the business, exactly how much growth do you expect to see? How are you going to spend the money to inspire that growth? What position will you be in if that growth never occurs? These are all very important questions to ask because you should only borrow money if that investment will create considerable growth and generate enough income to comfortably pay back the loan. If you are unsure whether your return on investment will be higher than the loan itself, you are borrowing too much money. It’s important that you create detailed growth forecasts and consider the worst case scenario before deciding how much to borrow.
Calculate The Monthly Payments
Being able to pay the loan back is obviously very important, so make sure that you calculate the monthly payments first. There are some great sites like Pigly with brilliant loan payment calculators, which you can use to get an idea of exactly how much you will owe each month. Once you know what the monthly payments are going to be, you then need to factor this into your budget. Unless you can comfortably afford to make payments each month, you should reduce the amount that you are borrowing. As soon as you start missing payments, you will find yourself in a very difficult position and your finances will spiral out of control.
Look For Alternatives
Business loans are the first port of call for so many businesses, even though there are other ways to raise quick cash. Although business loans are the most common way to get the money that you need, there are also grants available for some businesses. Using a line of credit is a great alternative to a traditional business loan as well because you only borrow what you need and you don’t have to pay interest on a large lump sum that you never really needed in the first place.
You might even be able to raise the money that you need without borrowing in any form. Selling off some extra stock at a reduced price could give you a quick cash injection or you can look for ways to cut spending around the business.
Before you start signing any paperwork, it’s vital that you work out exactly how much you should borrow so you don’t overstretch yourself.
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