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How Much Financing Do You Want?
It happens at least once a week: I’ll ask a business owner applying for a loan how much money he or she needs and I will get an answer like, “as much as you can get me.”
This response betrays two worrying realities about many business owners: a lack of financial planning and an attitude towards lending as a prize to be won.
Financing is, no doubt, an important part of any successful business. However, without proper planning, the temporary cash injection and subsequent monthly payments can wreck havoc on your business’ bottom line.
I like to tell entrepreneurs I meet with that, despite all the frustrations of dealing with small business lenders, both parties share the same goal: the success of the company and drama free loan payments. All underwriting, from credit checks to financial statement analysis, ultimately comes down to one question: will the business be able to pay back this loan?
I challenge all my clients to ask this question of themselves before ever submitting an application. Using one of the many debt payment calculators, I’ll often show them the significant impact that loan amount and term can have on monthly payments and cash flow. In almost every situation, too much financing can be just as harmful as not enough.
So, how do you turn “as much as you can get me” into a well thought out, financially sound loan request? It starts two key questions:
How much do I really need? Having a detailed budget of what the funds will be used for goes a long way towards understanding the real need of the business. Whenever possible, get actual costs of the inventory you are looking to purchase or estimates for planned construction.
How much can the business comfortably afford? If you can’t honestly answer this question, you should reconsider whether financing is the right step at this time. There is nothing more important to a lender than showing that the business can cover monthly payments.
Manuel Dominguez is the Director of the NYC Business Solutions Centers in Brooklyn. If you have a question or comment for Manuel, drop him a note below. And, please share this blog entry with your colleagues on Facebook, Twitter, LinkedIn, email, and your favorite social media sites.
