Opting for a business loan involves a series of decisions, each of which is crucial to your success as an entrepreneur. You may have finalised the best possible lender and business loan scheme with the best possible business loan interest rate. The story, however, does not end here. It is equally important to decide on the exact amount that you need. This will primarily depend on two considerations – the status of your company and the market rules and regulations. At the company level, you would have assessed the basics such as your company’s life stage, financial status, future plans for growth, repayment capability and so on. It is essential too that you study the market offerings and understand the nitty-gritty of repayment.
In order to determine how much business loan your business needs and the amount you can avail yourself of, we recommend a two-pronged analysis and approach.
(A) Inward-Looking Company Analysis:
This involves a detailed scrutiny of what your company genuinely needs in terms of business financing, by carrying out the following steps:
(a) Take a Relook at Your Business Goals
The first step is to revisit (or draft) a business plan to outline how you see your company growing in the short term and long term. A business plan is a comprehensive plan that outlines the company direction and operational objectives on all fronts (strategy, marketing, finance, operations, customer-looking, people etc). An analysis of your goals, especially financial ones, will give you an idea of where you need to infuse additional funds.
(b) Assess Your Current Financial State
The answer to how much business loan your business needs can be unravelled in a series of questions related to assessing your current financial state. The idea is to gauge what you need your loan for.
Current financial assets: Take a stock of your current financial sources and assets. Classify them under different categories such as liquid sources or immediate sources, and fixed assets that are not liquefiable. Whether you have assets to be given out as collaterals plays an important role in the amount of loan you can take. This gives you an idea of where and how much funds you have for the current state. It will also help you understand of what use your current funds are – whether you can use them for short-term working capital or for long-term investments. Refrain from taking into consideration unreliable income sources, in order to get a clear and undistorted picture.
Current financial liabilities: Take stock of your dues, whether to creditors or to suppliers, or to pay off an earlier loan. Assess your current business loan interest rate, if any, and your payment capacity to negate these. Be honest with yourself about what you owe against what you earn, and you will be able to predict your financial outflows. This will directly impact your capacity to take a business loan and the amount you can opt for.
(c) Predict Your Future Needs
The current financial state and business plan will help you project your financial needs for the future. It is important to carry out an authentic prediction as far as possible – overestimation of finances has frequently led to businesses going bankrupt in the past. A number of analytics tools are available nowadays to carry out such predictions. Predictions should hold true for the next one, two, five, 10 years and further on, to help you decide the split between your immediate and long-term business loan requirements and the respective loan amounts. It is also important to gauge the impact of each business loan interest rate on your financials to get a clear current and future view.
(B) Outward-Looking Market Analysis:
It is crucial to be aware of the trends, offerings and rules in the lending market to add the element of practicality while on the quest for business loans.
(a) Assess Your Creditworthiness
Being ready to take on a significant loan (and thereby risk) is one thing, but lending institutions have their own rules and regulations to approve a business loan amount. A good deal of this depends on your creditworthiness as a business, and sometimes as an individual. It is a good idea to periodically track your creditworthiness on two fronts – your company and you as an individual. Credit rating agencies offer credit rating services at a cost. Alternatively, you can turn to the CIBIL’s Company Credit Report (CCR), which maintains the credit history of a company based on information submitted by banks. The CCR and credit score are largely referred to by banks to determine your eligibility for a business loan, especially its amount. It is important to incorporate this external outlook in your research for determining how much business loan you need and can avail yourself of, and at prospective business loan interest rate.
(b) Evaluate Your Industry
The nature of business and industry that you operate in significantly affects the amount of loan you take. Industries that require heavy initial investments, such as setting up a factory or a core sector offering, may rely a lot on sizeable infusions of long-term financing. On the other hand, an e-business such as an e-commerce platform will need finances mainly for the supply chain and inventory management. A services e-business may not need any initial investment, and hence may require only small amounts of working capital loans. It is important to curate your loan type and amount to your industry of operation.
(c) Understand the Market Offerings
Different business loan mechanisms cater to different needs. After the above steps, you would have got clear pictures of your repayment capacity, ideal loan tenure, repayment finance sources, and other loan features. Match these to the various instruments available in the market, and determine which scheme and what amount of business loan suits you the best. Whether secured or unsecured, long-term or short-term, professional or trade loan – each choice that you make will significantly alter the financial dynamics of your business. Most importantly, scout for a suitable business loan interest rate that matches your repayment capacity.
Deciding on a loan amount is not an easy decision. As seen, it requires an in-depth analysis of a number of factors that are both internal and external to your business. Evaluate a number of lending options and make the best possible decision.