Whether you want to start a new business or expand the existing one, a business loan remains indispensable. There are business owners who have enough capital at their disposal but it does not make sense to invest the entire amount in the business. This is where a business loan makes all the difference. The loan will allow you to spread the risk over several years and gradually pay in easy and convenient EMIs as the business grows. If you know that you need a business loan, here are some questions you must ask yourself before you proceed with the application.
- What is the amount that I need to borrow?
Financial assessment and proper calculation are essential to avoid over or underestimation. It is advisable to create a cash flow estimate for each month and it should include all the costs involved in the business. The calculation must be in detail and it should also consider the difference between the time taken to receive payments from the customers and the time allowed to you to make payment to suppliers. If you borrow more than you need, you will end up paying more interest and if you borrow less than you need, you could jeopardize the business. You need to have an accurate answer to the amount of funds you require.
- What is the cash flow situation of the business?
It is important to answer this question before you sign on the dotted line. Do not be very optimistic when you answer it. You need to have a solid financial projection and debt repayment plan in place for the business. It will add credibility to the loan application. A healthy monthly cash flow is considered a positive sign and lenders will be happy to extend the loan. You must have a monthly cash flow balance that is three times your EMI so do not create a projection that has little room for error, it could scare the lenders. There are EMI calculators available online. You can make use of them and create an estimate of the monthly cash flow.
- How is the financial health of the organization?
If you have regularly maintained a healthy personal credit score, it will reflect on the business credit score. Hence, you need to ensure that the debt to income ratio and the cash flow is in order. You should have been regular in filing the tax returns each year. A good business credit score will make it easier for you to get loan approval. You may also be able to enjoy low-interest rates on the loan.
- What are my borrowing options?
Business owners have various loan products to choose from. If you want to apply for a loan, you need to do your homework and get an answer to this question. You will have a plethora of choices to select from, so take a look at the terms and conditions and then proceed with the application.
When you have an answer to these four questions, you will be in a position to make a wise borrowing decision that aligns with your business goals.
