Many businesses find it difficult to reach the next level without taking out a small business loan. Before borrowing money, there are some calculations you can do to determine if a small business loan is right for you.
1. Is it time to expand your business?
Growth can come from expansion - a larger storefront or new product line - and may be necessary due to greater demand.
Purchasing new equipment is a common reason small business owners ask for a bank loan, allowing them to sell more products at a faster rate. In this case, it makes sense to apply for a short-term loan.
Source bids for new equipment from several vendors and use this amortizing loan calculator to determine if your overhead can accommodate a large equipment purchase from a short term loan.
You can adjust the figures to account for anticipated growth in sales and determine the repayment terms so you're prepared before meeting with your bank.
2. How much money can you afford to borrow?
Small business tax planning can include reinvesting and setting 5 or 10-year goals for your business.
These goals may include budgeting for a loan to help expansion. Your loan terms may include variable interest or a shorter repayment term. If you aren't sure whether loan terms you receive are favorable - or affordable - FBC can help. Part of our small business services includes long-term financial planning.
3. What to Take to the Bank
Before you submit your loan application, make a plan for exactly how you'll use the money. Be sure to account for any corollary expenses, such as equipment delivery, set-up, or a large outlay of supplies for a new product line.
Your financial records, a copy of your credit score, and your business plan are part of what you'll need to take to the bank. Include a marketing strategy to make your investment profitable, with forecasted revenue and anticipated expenses.
4. Understanding Your Collateral
Banks seek to minimize their exposure when granting small business loans, so property with tangible value as collateral may be part of the loan terms.
It's important to consider your ability to repay the loans, especially if you don't reach your estimated revenue targets.
Use the loan calculator to determine the maximum monthly payment with the highest interest of your terms (if you have variable interest) to decide if you're comfortable using personal property as collateral.
If you need assistance determining whether your small business is capable of taking out an expansion loan, consult with your FBC tax planning specialist.
Business loan interest and collateral items may earn you certain tax credits, so FBC can help you determine whether the terms of your loan will help or hurt you at tax time.
5. Do I Really Need a Small Business Loan?
Business loans are based solely on your ability to repay, and banks won't have access to your profits outside of that.
In addition, interest on business loans is usually tax deductible – smart tax preparation can maximize this. You'll have access to a lump sum immediately, letting you get to work fast, and over time you'll build your credit, making it easier to get future loans.
Before you rush into a loan, there are some downsides to consider. Start-up business loans have very close scrutiny – you don't have a demonstrated history of profitability, so your business plan forecast and personal credit history will need to be tight.
You may be asked to provide collateral in the form of your personal property, a choice many aren't comfortable with.
Your business loans may also be subject to rate fluctuations. While there's a cap on these rates, use this loan calculator to ensure that you'll be able to weather a storm of increased loan interest rates.
There are many things to consider about small business loans. Part of your growth includes planning for expansion, and bank loans are often part of that consideration.
FBC can help position you to make the best decisions for your small business. Give us a call to learn more about how year-round tax planning can help your small business.