Small Business Finance - How to Calculate Your Needs

By Nathalie Fiset

Your optimism on the future of the business may overshadow the crucial aspects and specific details required in keeping the business on the progressive status. Sometimes, owners happen to be very aggressive and confident in terms of financial standing that they tend to become very lax when dealing with borrowing money. This creates a big problem since every cent of the money borrowed needs to be put into proper use. Unfortunately, what happens to some is that when they have the chance to borrow money, they borrow more (or less) than they require.

So when it is time for you to take a small business finance, you have to know how to calculate your needs.

There are several factors that affect the amount of money you need. They are worth discussing one by one.

Credit rating - The eligibility for a loan, especially on small business finance, is based mainly on the credit rating of the person. A good credit score means higher amount of loan and lower interest rate. Tip: Obtain a copy of your credit report long before you approach a lender. With a good lead, you have enough time to improve it further or to have your score fixed should there be any inaccuracies. Also gather all your business documents. This includes financial statements with attachments and schedules, tax returns, financial statement (interim year-to-date), and other documents that will help the lender assess your loan application. By doing so, the processing time is reduced.

Savings - Establishing a business or keeping a business running requires a good capital. Pulling out money from your saving will significantly reduce the amount of money you require for a loan. Tip: before you borrow money from lender, tap your resources first. This can cut the amount of money borrowed and the interest you pay, which in turn will increase your profit further.

Expected return/monthly expenses - Before borrowing money, project the amount you can afford to pay back. Your expected income minus the monthly expenses should be well over your loan payment.

Amount required - How much money do you need? Where should the loan go? These 2 questions should be answered first before you go to a lender. You do not simply say, "as much as you can lend" when you asked by the lender on how much money do you need. A reply like this will definitely shut your chances of getting a loan. Have a good estimate of how much money you need. Know where the money should be spent. This way, you can better plan the repayment or project whether or not you can afford to pay the loan back. Another good thing about knowing exactly how much you need is you can carefully manage your finances against other factors that were mentioned above.

Your credit rating, savings, expected return, monthly expenses, and amount of loan required should therefore be included when calculating your needs.

How to Calculate Your Needs?

Once you know where the money should go, identify which items are optional and which are necessity. Having a good funding on your small business is imperative but creating an impartial judgment towards management of funds will bring you a long way. Pinpoint the total amount of money you need by enumerating the small detail. For example, the start up expenses you may include: installation of fixtures and equipment, fixtures and equipment, decorating and remodeling, starting inventory, licenses and permits, legal and other professional fees, deposits with public utilities, consulting and software, advertising and promotion for opening, cast, etc.

Then ask yourself, "Can you afford to pay for the loan?" Borrowing is easy, paying it back can be a problem. So to make sure that you can afford to pay the money back, make a good projection of the future income of your business. Compute your monthly expenses which may include the following: monthly expenses, salary of owner-manager and staff, rent, supplies, advertising, telephone, utilities, delivery expenses, insurance, interest, taxes, maintenance, legal and other professional fees, etc. Deduct these expenses from the projected monthly income. Is your net income more than enough to pay your loan? If yes, then the loan can be borrower. If not, then it is not worth the risk.

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