Business Loans: What Can You Afford?
No matter if you need to restock your inventory or you need business capital to pay for an upcoming equipment purchase, chances are you’ll want to borrow money to ease the financial strain of a huge business expense. While it may seem ideal to take out a business loan that covers your entire expense, this may not be the best option for your budget.
Here’s how to determine how much of a business loan you can afford.
Set a Figure
Asking for too much money can make a lender weary about loaning you money while asking for too much can leave you without the funds you need. Determining how much money your business needs and balancing that total with how much your business can afford is hard.
To figure out how much money you need to borrow, create a financial projection. You want to write down your cash flow as well as profit and losses that you’ll incur. This information is not only helpful for you, but lenders will see that you’ve taken the time to think the amount through.
Once you’ve determined how much you need, the next step is to figure out if your business can afford to repay that amount. Taking out too big of a loan can leave your business in a financial bind. Being strapped for capital funds is no way to run a business.
Calculate how much loan payments will be and then factor that cost into your budget. If you can comfortably afford the payment, then the amount you’ve chosen is acceptable. If your budget is tight after adding in the loan payment, your best bet is to reduce your loan amount.
Pick a Loan
Before using a business loan calculator, you’ll want to first determine the type of loan that you need. If you’re unsure, you may want to research to see which options you’re eligible for. For example, if you’re a startup or a new business, your borrowing options are limited as most traditional lenders have strict loan requirements, such as a solid business credit history as well as years in business as well and income threshold.
Since business loan calculators use algorithms that are based off of certain loan types, you’ll want to narrow down your options. From there you can compare the various calculators to see which loan offers you the most affordable monthly payment as well as the best terms.
Understanding the Numbers
Once you’ve found a business loan calculator to use, you’ll want to understand what the numbers are telling you. The purpose of these calculators is to determine your annual percentage rate (APR) so that you know the true cost of the business loan.
What many borrowers don’t realize is that the loan’s interest rate is only a fraction of the total cost. Many lenders charge fees aside from interest including origination fees, application fees, and closing costs. A business loan calculator can do the math and determine your APR.
The Next Steps
Once you’ve determined your APR, you have a good idea of how much certain loans will cost you overall and each month. While some loans will be more affordable than others, you don’t want to base your decision off of cost alone.
There are many other factors that you’ll want to consider before signing the dotted line such as collateral. Some lenders require that collateral be put against the loan in the event that you are unable to make payments. Collateral must be a physical asset that you own such as your home, car, or even your business’ inventory.
Since certain lenders require high value collateral, if you don’t have the assets to back the loan, you’re unlikely to get approved for it. Other lenders may ask you to sign a personal guarantee. This makes you legally responsible for any remaining loan balances in the event that your business is unable to make payments.
Another factor to consider is the lender’s reputation. You obviously want to work with a lender that believes in your company and is available to help with any questions or concerns you may have. Read client reviews and check with the Better Business Bureau to get information about the lenders that you’re considering.
Other factors to consider before applying for a business loan include:
- Processing time
- Penalties such as pre-payment and late fees
- Customer support
While you may have found the perfect loan for your company, be sure to dot your t’s and cross your i’s to be 100% certain that you’ve found not only a solid loan, but a solid lender.
Determining how much business loan you need, what you can afford, and the overall APR can be confusing. To make the process a little easier, be sure to use a business loan calculator to do some of the number crunching for you.