Deciding How Much of a Business Loan to Ask For
by Danny Brown on March 6th, 2008
When you’re starting out in your new business, one of the things that you may be considering is a business loan. These are excellent for helping people get started in their own business, as they offer far more favorable rates than a standard loan might offer. They’re also a good way to help maintain your company during lean spells. However, it can be difficult to decide how much of a loan you actually need - after all, it may be just a booster to top up your own finances, or it may be on a larger scale.
Deciding how much you need for your business loan is easier if you set out some basic pointers. One of the best ways to do this is with your business plan - this should offer a good idea of what costs are going to be involved, and that in turn will let you know how much your business loan needs to be.
What Does Your Business Need?
Another way to decide how much to ask for when applying for a business loan is to determine what it will go towards. It may be that you can afford the rent on any office space you’re taking, or the initial stock and supplies, but what else do you need? If you make a cash flow list of some of the key equipment and items that you need (depending on your business), this can help make the decision easier:
- Buying supplies/inventory
- Paying any wages and rent
- Buying fixtures and equipment for your office/retail space
- Computer(s) and accessories
- Business services, such as website design or marketing
Once you know what your business needs are, you can then deduct this from the cash flow and initial investment you already have. That should then allow you to make the decision on how much of a business loan you need.
Time Factor
Once you decide how the money from a business loan is going to be used, you need to look at the time factor involved - again, this can go a long way into helping you decide how much you actually need to borrow.
For instance, will the loan be for a quick-fix solution to a temporary cash flow problem? Or will it be used with a longer-term plan in mind, perhaps for new acquisitions or getting you through a seasonal dry spell? Obviously if it’s a short-term solution, then you may not need as large a loan as you would if you need to see yourself through a shortage of sales or orders.
Affordability
Perhaps one of the most overlooked areas of a business loan is actually knowing how much you can afford to ask for. If you take out a loan for a short-term fix, and then the payments are too high because of the short timescale in which you need to pay them back, then it could be causing even more problems for you financially. Look at your business and your outgoings, and see what you can realistically afford to pay back each month without going in the red. This will then let you decide how long a term you need to pay the loan off, as well as how much the loan itself should be.