How to Determine the Amount You Need to Borrow
If you operate a business, there’s a huge chance you’ve already taken out a business loan – or at least considered applying for one. Contrary to popular belief, acquiring Seattle business loans can be the best thing that ever happened to your business. With one, you can buy equipment, fund expansion, purchase inventory, and most importantly pay for your day to day operations.
Business owners often turn to small business loans to finance slow periods and/or take their business to the next level. To facilitate a smooth business loan application, you must figure out the amount of money you need to reach your goals. Besides, you should be able to declare how much you need when applying for a loan.
However, for those new to this, it may be hard to determine exactly how much loan to take out. Here are four factors you need to consider to determine how much you need to borrow.
1. Amount of Money Your Business Needs
Evaluate your business and estimate how much money you need. If you task lenders too much, they’ll question your ability to pay back the loan; if you don’t ask for enough, you won’t be able to fund your business. So, to arrive at an accurate estimate, create a comprehensive cost projection on how you plan to use the funds. Other than that, you should also make profit and loss cash flow statements that will show how the revenue you’ll generate creates a profit.
Having a clear idea of how much your business needs will also work to your advantage as it will show the lenders that you’re responsible and informed of your business’ needs. With that, you’ll have a greater chance of being approved of the loan.
2. What You’ll Need the Loan For
Determining the purpose of the loan is the very first thing to consider when thinking of applying for a loan. This question will affect all the parameters in a loan application, including the amount you need to borrow. Some businesses will need to take out a loan to fund expansion, buy equipment, open a new location, or cover temporary cash flow gaps.
Whichever reason you need the loan for, it will determine the amount you need to borrow. For expansion, you’ll need to borrow larger amounts with longer repayment terms. On the other hand, covering temporary cash flow gaps would require lesser loan amounts.
3. Determine How Much Your Business Can Afford
When taking out a loan, you have to make sure you can repay it. Otherwise, it would ruin your credit standing which lessens your chances of getting approved for business loans in the future. Lenders will evaluate your business’ debt service coverage ratio (DSCR) or your company’s available cash that will be used to repay the loan within the repayment term. You can also calculate your DSCR by knowing what your cash flow is, as well as the amount of money you have left to make debt payments.
Additionally, lending companies also check your personal debt to income ratio (DTI), which calculates your monthly income and current levels of debt. They’ll evaluate your mortgage payments, car payments, credit cards, and other debts. Ideally, your personal debt should be no more than 36% of your monthly earnings.
4. Cost of the Loan
You need to factor in the total cost of the loan, including the closing costs, interest rates, and the total amount you will need to pay back. It’s important to ask these questions before you agree to apply for a loan. By knowing the total cost of the money you borrow, you can determine the type and the amount of loan you need and can afford.
Related: Important Questions To Ask Lenders
5. Financing Needs in the Future
Lastly, you also should consider your future financing needs when applying for a loan, especially if your business plan calls for an expansion soon. Be sure you figure out whether you will need a smaller loan that helps build your credit or secure a larger loan for the future. By planning ahead of time, you will make smarter decisions regarding your financing needs both now and in the future.
Seattle Business Loans – Small Business Loans for You
Applying for Seattle business loans doesn’t have to be tedious. As long as you know how much you need and you have a perfectly good reason for taking out the loan, you’ll be good to go. Moreover, be sure to have all the necessary documents ready to avoid delays in the loan approval. Taking out a loan is a great investment for your business, but it’s also important to use in the most responsible way possible.