How Much Money Should I Borrow to Start My Small Business?
June 20, 2015
One cannot talk of starting a business without talking about the finances required in setting it up. In order to bring that business plan to reality, there should be a clear-cut strategy on how to go about it, and this includes having the funding to back the project up.
There are many options small businesses have for business loans. Most would turn to banks immediately for this, while others prefer lending institutions that specifically meet their needs. For those who are liquid enough, and if the business is small enough in scale, they just go ahead and take it out of their own pockets. Some would rely on peer-to-peer or family loans, too. Regardless of the method, the important thing is that there is a source of capital for the investment to be made, and this is what the business will work with to expand and grow.
The cost of a business will largely depend on the logistics necessary for its type. If the business involves the manufacturing of a product, then investment for the equipment must be made up front. If it involves retail, then there should be a decision made, first and foremost, if it’s going to entail a physical store or an online shop. After this, the expenditures will most likely be spent on the suppliers of the product, which will then be distributed through the stores.
The costs do not stop there, however. There’s still the matter of hiring staff and setting up the necessary technology to help manage the business efficiently. All of these things, and much more, will ultimately require start-up capital, at the very least, just to get the ball rolling.
What do you need a loan for, exactly?
When it comes to new business owners seeking loans, it is common to be unsure on how much they should actually ask for. Of course, the safest and simplest way to find out how much will be needed for the business is to paint a clear picture of the revenue model and operating costs. Figuring these numbers out should make it easier to project how much funds are actually available, and how much will have to be borrowed.
Opening shop is not the only scenario that may lead the business owner to seek out a loan. Sometimes, it will be to improve or upgrade existing equipment and technology. Other times, it’s to expand the shop by adding space to the existing one, or by opening a new branch in a different location. Whatever the reason may be, it is advised that a clear analysis and assessment be made first before applying for a loan. Sometimes, it may seem like the cost is just too big for a project, there is no other option but to take out a loan, when in fact, there are other viable means to deal with it; it will just take a few adjustments on the current budget set-up.
Only ask for what you need
How much is enough for a loan? Most people would probably want to stay on the safe side and prefer to get a loan in excess of what they need, rather than get an insufficient amount. Understandably, it is going to be an additional issue for the borrower to have to take out another loan just to complete their needs, as opposed to having a complete one from the get-go.
Still, it is not advisable to get a loan without any real understanding of where the money will go, or what it would be used for. It is also not recommended to be complacent and rely on one’s eligibility for a loan. Although you may be able to borrow a huge amount of money, it doesn’t necessarily mean that you have to make the most out of that eligibility. Say you need $5,000 capital, and then the bank tells you that you can actually get $15,000. Don’t go for the $15,000 although the offer may be attractive. If you don’t need it now, and get it anyway, it will end up being an unnecessary burden for you once the due dates come rolling around. To put it in a better perspective in simpler terms, you will be paying for a loan you did not need in the first place.
Don’t forget to factor in the interest
If, for example, you would like to expand your small business by opening another branch, you have to determine the amount you will need for it by comparing the cost required versus the profit you expect to derive from it. Remember, also, that when you borrow money, it’s not just the principal that you will be paying back, but also the agreed upon interest. The bigger the loan, the more interest you will need to pay. Most lenders, therefore, make the mistake of pegging the principal only as their ceiling due amount, when in fact, there is still the additional interest rate, which could easily be anywhere between 20% and 30%.
Always, when applying for a loan, keep the matter of interest in mind; otherwise, you will fall short. With missed payments, not only will you end up paying for cost and interest, but also the penalties or surcharges attached to delayed payments.
Therefore, if you are expecting to need $25,000, and you find out that the lender can actually give you $50,000, opt for the safe amount and instead just go for $25,000. If you would feel more comfortable with a buffer amount, then lending $30,000 should be fine. The point is, at least although you exceeded the amount you borrowed, you kept it at a manageable amount, and you can just use the excess amount to make the first few payments, if possible.
Most importantly, make sure that the small business loan you will be getting will actually be going to where it is supposed to go. Also, you have to ensure you make your payments on time; you would not want to be on the blacklist of these business lenders because you have been flagged as a delinquent loaner.
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