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How to Know if You Can Afford Borrowing Money for Your Business

How to Know if You Can Afford Borrowing Money for Your BusinessKnowing whether you are capable of borrowing money for your business is a vital step in the money lending process that you need to take before looking out for potential lenders.

With so many business loan providers available, from banks and private institutions to small business loan online, determining if you have the resources to make timely loan payments is crucial. Here are some expert tips for calculating your credibility as a small business borrower.

Think from the lender’s point of view.

If you’re looking for a business loan, you need to start thinking about the loan process from a lender’s point of view. Before taking out your calculator, familiarize yourself with some key questions. To sum it up, here are the questions most lenders have in mind when determining whether to approve or deny your application.

  • Can you pay back the loan?
  • Will you pay back the loan?
  • What are you going to do if you can’t pay back the loan?

Sound’s simple, right? However, if you can answer these questions confidently, you’re going to find success with small business lenders.

Loan payback ability.

Banks and alternative small business lenders use several tools to know if a business is a good candidate for a loan, one of which is a debt service coverage ratio (DSCR.) Figuring this out is easy enough. Start by calculating the cash available for your business. Cash available aka cash flow, is the movement of money into and out of your business, which is measured over a certain time period – typically weekly, monthly, or annually.

On the other hand, small business loan online providers utilize more advanced tools to understand the performance of your business, and most often, there’s no paperwork required. You’ll just need to link your everyday business bank account (and other optional data sources) and they’ll run a swift business health check, which is focused on your cash flow. By using technology to get an in-depth understanding of your business performance, it means that they can give you a decision rapidly.

Loan payback possibility.

Lenders just don’t focus on your businesses’ financial situation when determining your credibility. Most also look at you, the business owner, and your financial capability as a person.

Lenders use a tool called debt-income-ratio (DTI) to know your suitability for a loan. They’ll also look at your history of paying bills. If the prospective borrower has a bad record and a low score, he or she will find it hard to get a loan. If you don’t have a good credit score, try shopping around for alternative lenders.

The issue with failed repayment.

You need to answer one final question: What will you do if you can’t pay back the loan? It’s not an easy question to answer since it means admitting a hard truth: what if your business doesn’t work out?

The right answer is a backup plan in the form of capital or collateral – having assets that the bank can claim if you’re not able to pay up will help. If you don’t have this cushion, lenders may make use of a personal guarantee. Signing a personal guarantee on for your business loan means that, if you can’t pay back the loan via the business profit or capital/collateral, you’ll be required to pay it back out of your own pocket.

Considering a business loan for your small business? If you’re looking for a quick assessment, you may check out a small business loan online portal where you can upload your business information and get an instant response.

 

Have you ever considered taking out a loan for your business?

 

Photo courtesy of: jarmoluk

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Kayla is a mid-20s single girl living in the Midwest, USA. She is focused on paying off her consumer and student loans, while simplifying her life and closet. You can join her on her journey at ShoeaholicNoMore or follow her on Twitter.

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