Small businesses require often loans to get on their feet. Small business loans or additional capital will cover initial stock costs, property rent, wages or other overhead, with the expectation that future profits will quickly pay back your investment and the interest on top of it.
However, sometimes the question as to how much to borrow can feel like the question ‘how long is a piece of string?’ That’s because borrowing too little might see you run out of capital, or be forced to make a last-minute loan to prop up your business. Borrowing too much, on the other hand, will mean that you overestimated your requirement for capital, and you’ll have more to pay back (plus interest) in the long-run.
A final aspect of loan figures to consider is the fact that the bank or lending society that you’re applying to may reject outlandish loans that are either too low or too high. They’ll see you as inexperienced and untrustworthy. This article looks to find the sweet spot in how much your company should be seeking to get business loans that count.“Before you talk to a lender, you should assess your need for financing, how much you intend to borrow, and how the money will be used. Lenders would want to see a clearly defined need, so you should be able to demonstrate this information to them clearly during your meeting.” – Jay DesMarteau, Head of Commercial Specialty Segments at TD Bank
Total Up Projected Costs
As a general rule, before we examine the more specific aspects of expenditure planning you’ll have to undergo, you need to reach a total figure for how much you expect your business operations to cost you in the period over which you’re requesting the loan.
It can be challenging to know where to start in this regard. How can a small company, that’s both inexperienced and expecting to grow, predict the future? You’ll have to start with the very basics before moving forward into the more technical aspects of your specific business niche.
The basics are the easiest component of your business’ expenditure to identify, label and predict. They’re your basic overheads: the costs that’ll keep recurring as you continue to develop your business procedures and strategies. Some examples include:
- Rental payments and property costs
- Utility bills such as electricity, internet, and water
- Wage packets for your employees
- The raw materials or products that you’re purchasing or manufacturing
- The development of your brand, website, marketing campaigns and PR strategy
- The equipment you need to operate your business.
The list, of course, goes on. Running a business is costly, and before you happen to make some profits from your business operations, you’re going to need a loan to cover some of these essential costs.
Factoring in Variability
Each of the elements that require funding has a maximal and minimal range. For instance, the wage packets of your staff at present would be the minimum amount of cash you need for wages.
However, if you’re to hire new staff, give pay rises, or you are forced to shoulder the cost of expensive temporary workers to plug an HR gap in your company, you’re going to exceed this minimum.
The same rule can be applied to all of the essential capital-requiring elements of your business. As such, you should try your best to calculate the maximal requirement for cash in each of the fundamental aspects of your business. The figure you arrive at should cover precisely that: the basic operation of your business.
Getting into the Details
There are two benefits to producing the maximal figure described above. First, you’ll not suffer heart palpitations when the basic summary you made for your business expenditure happens to be below what you actually spend.
Second, and perhaps more importantly, is the small aspects of spending maximal predictions can entail.
For instance, you’ve been efficient this month, and your maximal loan for the basic operation of your company hasn’t all been used. You happen to have a good deal left over, which can then apply to the more delicate details of your business, often leading to increased profits and your eventual non-reliance on loans. So, what else can you spend your investment on that’ll get you to the point of financial stability and independence?
Your profits are what will pay back your loans and help you operate without the stress of organizing further loans to support the operation of your business. How can you use some of the cash from a loan to take you a step closer to this ultimate goal? Here are some things for small businesses to consider spending their money on:
- Brand Development: Your brand is what communicates your overall business. It should have character, charisma, and quality. Getting a professional designer on board to help you with this, both conceptually and physically, will help your business sparkle in the eyes of consumers.
- Marketing Campaigns: Some businesses don’t require all that much marketing, but for those that aren’t B2B and require customers to drive sales and profits, it’s imperative that you spend some money on marketing your business and its products.
- Outsourced Assistance: Some small businesses prefer to go it entirely alone, but most know that if they’re short on some specific, niche expertise, they’ll be able to tap into by outsourcing to third parties. From web design through to predictive and dynamic business strategizing, you’ll be able to find incredibly useful help – for a price.
- Hardware and Software: Efficient and successful business is often built upon the technology that a company deploys. For instance, outdated and slow software can have a significant impact on productivity, which in turn affects your profits. Some cash should be spent on getting efficient and acceptable hardware and software to aid your business operations. This industrial equipment financing will help you generate more productivity from your capacity.
“The underwriting department relies on strong figures and ratios, so you need to make sure your bookkeeping is in order. To do this, you should invest in an accounting software that provides an organized presentation of your financials.” – Thomas J. Williams, EA, Tax Accountant at National Association of Enrolled Agents
Whether you’re considering one of the options provided above, or you’ve got your own vision for profit-driving tactics, you should ensure that your small business loan certainly enables you to deliver yourself from the hands of the lenders into your own financially independent world.
How Much Should I Borrow?
The answer remains: how long is a piece of string? You need to sit down and do some significant research and calculation before you pull a future out of a hat. One thing is for sure; a cash advance can work wonders for your business.
Cover the maximal figure for the basics, and make sure you’ve got enough cash to pursue the profits that’ll liberate you from the need for further loans.
Figures vary wildly, but if you’re looking out for the right signs, you should be able to come up with an appropriate number for your small business at this stage in its development.