Whether to start a business, open a new store, purchase equipment, or fulfill other operational needs, getting a business loan is one of the options for businesses so that they won’t lose momentum due to low capital. Knowing how much money you need will help you choose the right business loan. Here’s a guide on determining the amount you need to borrow.
Why is business loan amount important?
A loan that is too large can disrupt your business’ cash flow, making it harder for you to forecast your finances. Moreover, it might affect your ability to qualify for a loan the next time you need it.
However, if your loan amount is too low, it can interfere with your business launch or operations, as you are unable to meet crucial financial needs for yourself, your employees, and business partners. Thus, you should aim to pick a loan amount that helps your company grow without drowning in debt.
Determining Your Loan Amount
1. Know the purpose of your loan
The first step in determining your loan amount is knowing the purpose of your loan, whether it’s starting, buying, running, or growing a business. Each of these purposes require different amounts of business loans, so have a clear idea of what you need to use the loan for.
Here are some examples of why businesses need a loan:
- Invest in expansion opportunities
- Expand and replenish inventory
- Maintain cash flow
- Purchase, repair, or replace equipment
- Improve terms on a larger loan
2. Create projections for the borrowed funds
Next, create a detailed cost projection for how you are going to use the loan after you get it. List out the things you need and purchases you will make with the loan, such as equipment, inventory, wages, leases, or other needs.
Other calculations you need to prepare are financial projections, profit & loss, and cash flow statements so you can estimate the revenue you will generate with the loan, and the costs. By having these projections, it will be easier to determine the amount of money that you need, while also showing lenders that you are informed and well-prepared.
3. Learn the extra cost of your business loan
The total amount that you will pay back to the lender includes the principal amount along with closing costs and interest rate. Learn about these fees and consider whether the amount is still reasonable enough for your business, so that you can figure out the amount of financing that you should pursue.
4. Consider the impact of the loan on your projections
After knowing the costs, factor in the return. As profit is a focus of most businesses, do a cost-benefit analysis to see if the loan is worth it. Work out how the loan money will influence your future revenue, and how much profit you can get. Consider whether a higher amount will increase your profits. You might benefit from having an accountant to look at your past business accounts to make sure you will profit from the loans. By having these calculations, you can better determine the optimal amount to borrow.
5. Plan ahead for future financing needs
Planning ahead helps you strategize better about financing your business now and in the future. Business loans are not just needed at random times, especially for working capital loans. There are patterns that you can look out for, such as different times of year when you need loans the most. If you already have future plans that require financing such as expansion, you can start early on working out the amount you will need.
How to Borrow a Larger Business Loan?
Make Yourself a Strong Candidate
If you are sure that you need a larger business loan, be sure to present a strong application. Show lenders that you have a reliable credit score and a proven track record of profitability. If possible, spend some time improving your personal and business credit score. Pay off debts on-time and reduce your credit utilization ratio. You can also benefit from removing any errors from your credit report.
If you want to qualify for a larger business loan amount, you’ll need to present a strong application. That means applying with a strong credit score, a high Debt Service Coverage Ratio (DSCR) and a low Debt-to-Income (DTI) ratio, among other things.
Get to Know Your Options
Besides making yourself a suitable candidate, consider all the options you have for your lenders and loans. For example, traditional financial institutions such as banks are known to have a stricter selection process compared to alternative lenders.
Although bank loans have lower interest rates, it can be hard to qualify for one since banks require you to have a strong personal credit. Moreover, generally applicants need to have their business established for two or more years. There is also a minimum revenue requirement that applicants need to reach. Therefore, bank loans are more ideal for established businesses with collateral and strong credit.
Consider the Need for Collateral
Generally, adding collateral to your business loan can help you qualify for larger business loans, as securing the loan reduces the risk for your lender. However, adding collateral is not the most ideal option for some businesses, so consider if you are prepared to add one or go for a business loan that requires no collateral.
What Factors Affect Business Loan Amounts?
As lenders want to reduce risk as much as possible, there are some factors that they consider when determining your business loan amount. Here are the most important ones used to assess your application:
Personal and business credit
Your personal and business credit shows your history in managing loans in the past. To qualify for higher business loans, lenders look for applicants with remarkable credit scores.
The amount of revenue your business gets gives lenders more certainty that you are able to afford the loan payments. For example, most banks in Singapore require a minimum annual revenue of S$20,000 – S$30,000 to qualify for an SME loan. If you want a higher business loan amount, you’ll need even higher revenues.
Some lenders require you to have been in business for a certain period of time. In Singapore, the business age requirement ranges from 6 months, but some lenders require a minimum of 2 years. Normally, the younger the businesses, the lower the business loan amount they can get.
While not always required, opting to make a down payment may help you get a bigger loan, as it mitigates the risk for your lender.
A well-thought-out business plan makes you more qualified for a business loan. If your business plan is not robust enough or is shaky, or the industry you’re in is not stable enough, it may be harder to qualify for larger business loans.
Grow your business with a Fazz Business Loan
If you are a business owner looking for a loan to start or expand your business, check out Fazz Business. Fazz helps you accelerate your growth with quick, ready access to working capital. Our interest rate starts as low as 1% with approval within 48 hours. Apply for a Fazz Business Loan here to build, run, and grow your business with peace of mind today!