You find Bankable’s website and see that you can apply for a loan of $250,000. Wow, your mind is racing with all the ideas and possibilities of how you could spend that money. You think to yourself, “I could buy that building, pay off that line of credit, rebuild my website, etc”. Sure, you could apply for that full $250,000 and see if you get lucky, although luck has nothing to do with it. Instead, you could take the following two factors into consideration before deciding how much financing your business really needs.
First, think about what your business really needs money for (sounds obvious, right?). While working capital is a legitimate need, it may not be helpful to pay interest on cash that’s just sitting in your bank account. Strategize what will actually help your business and provide a long term solution. If you aren’t sure what could be a strategic use of funds, Bankable would be happy to give you some feedback before you apply!
The most important factor that should influence your loan amount is your global cash flow. Global cash flow includes your personal and business cash flow. Your business cash flow will tell you how much cash goes in and out each month and how much of your ‘net income’ is actually cash left to use. If you have $10,000 left at the end of the month after expenses, but add back in your depreciation expense of $5,000, then your business could afford a $5,000 monthly repayment easily. However, you need to know what your total debt service is. If you already make $10,000 in loan repayments each month, then you should not get a loan amount with a $5,000 repayment because your total debt payments will eat all your cash. If you want to understand more about global cash flow, here is a quick read: https://claytonmckervey.com/global-cash-flow-importance/
The same goes for understanding your personal cash flow. If you own more than 20% of the business, you will likely be signing on the loan with a personal guarantee which is very common. Sometimes being asked to personally sign on a business loan is surprising to people, but really it’s almost standard anywhere you go. This means that if the business can’t pay the loan back, then the signer is personally liable to make payments. Because of this, we look at your monthly income and your monthly expenses. In general, we add an additional $500-$1,000 to your credit report payments. If you have a high enough salary to support yourself but not to have extra spending money, then think about how you would be able to pay the loan back if your business is not able to.
Now you know two important factors when you are trying to determine the loan amount to apply for, and that Bankable certainly looks at them in the credit analysis process. Of course, this is not a free ticket to getting your loan with any lender as underwriting involves so much more. So don’t be surprised if for one reason or another you are approved for a different loan amount than what you applied for. Regardless of the loan amount, Bankable wants to establish a relationship with your business so it can then help strategize how to get your business ready for traditional financing.
Written by: Emily Franks