The people, who think of applying for loans whether of large amounts or smaller, have a fear that they cannot either afford to apply for or is not able to return it back. There are several reasons as to why people have such kind of fear; misguidance by others, less understanding of the terms and conditions and not knowing what to do.
But there are ways for you to calculate whether you can manage any type of small business loans. These ways area plus point for both lender and borrower. The two can easily estimate the capacity of loan borrowing strength and if not then how to make it manageable.
Small Business Loans you can apply for:
It is utterly important for you to firmly understand the types of small business loans that you can apply for. Before filling up the application form of loans either through a bank or a private lender; you need to have knowledge of the kinds of loans available.
- Lines of Credit
- Term Loans
- SBA Loans
You must be very well sure that the loan or the amount you are applying for is really a necessity for your business. The most important thing to consider is to analyze every financial situation so that you can be affirmative that you have any use of the loan. You can also think of various other options of finance such as; crowdfunding, venture capital or angel investors. But if the reasons are the following then small business loans is the only option.
- Buying inventory and equipment.
- Improve Credit Score.
- Enlarge the business.
- Start a new one.
- Compensate for various other expenses.
How to know you can afford?
Now when you have decided whether to have the loan or not and yes they made the decision of the kind of small business loans you want; it is time to see of your capability of having a loan and most importantly paying it off. The three factors mentioned below can help you to determine whether you have the strength of having a loan or not.
Estimation of the Debt Service Coverage Ratio:
This is an essential tool by which the lender and the borrower can estimate the capacity to pay off the loan amount that has been borrowed. It will help you determine the ratio of your qualification of the loan. It is very easy and a simple method to calculate the Debt Service Coverage Ratio (DSCR). The ratio can be based on monthly or weekly payments by using the following formula;
Cash Flow (sales-expenditures) / Loan Payment (principal+ interest) = DSCR
Many people will think that this ratio must be low to be applicable but it is not the case. It has been noted that the higher the ratio the better. Point 1 is convenient but it means no profit can be made. But a greater number will assure good revenue.
Determining Loan Performance:
Another means by which you can judge about a borrower’s ability to manage the loans is by making analyses of the loan amount you want to have. When either you or the lender is analyzing the performance of the loan, consider investing cost, average profit and loss, current and future revenues. Also whether the loan will profit the business you are investing in or not. Orumfy is amongst many companies that assist both the borrowers and lenders in determining the appropriate use and capacity of the loan amount.
Decide the Appropriate Loan Amount:
When you have fulfilled the two above mentioned tools it is vital that you know the ideal loan amount you want to borrow. It is very easy to decide the appropriate amount that is needed for the business. Calculate each and every specific detail that is required to know the correct loan.
Ways to Increase Affordability:
There are many ways by which a businessman can increase the chance of affordability of a loan. Several reasons surround when you cannot afford to have a loan but steps can be taken to increase it;
Boost the Income:
Take extreme measures to boost the incomes of the business that you are doing. You can make arrangements for marketing the product or the services you are dealing with. This will be a great help.
Pay off Current Debt:
If you have any ongoing loan that is not been paid off then first make plans to repay it and make it your initial priority. In this way, you can focus on one thing.
By decreasing the extra expenses you have of your business; the DSCR can be increased. When your ratio is stable then you can increase and manage the loan amount perfectly.
Make Credit Score Better:
There are many different lenders who demand a higher credit score when you apply for small business loans. So make efforts to boost personal and business credit score if you want to have a loan application approved.
It is not difficult for anyone to manage the small business loans when you are aware of what to do and which ones to avoid. You just need to be careful about the decisions you take.