How Much Is Enough to Borrow for Your Business?

by Crestmark 25. September 2014 06:25

When you're struggling with meeting the financial demands of your business, you may need access to capital. Whether you're a newer business or you've been established for quite some time, a shortage in cash flow can hinder your operations. It's important to decide exactly how much you need to borrow when you're worried about making payroll, securing supplies for an upcoming special project, or when you need to take care of unexpected equipment repairs. If you borrow too much, you're spending more than you need to on interest and loan repayment and that’s money that you could be spending on other things. If you don’t borrow enough, you'll be scrambling to cover your expenses. 

 

      

Here are some tips for narrowing down your budget to help you determine the amount of working capital you might need:

 

Forecasting Your Future

Use conservative estimates on leads, conversions, sales and profit margins. 

Analyze previous monthly, quarterly and annual reports for a comparable estimate. 

Learn your industry's high and low seasons; not only when they happen, but why they happen. 

Make projections for company growth, in both employee needs, equipment needs, and customer growth.

When you're planning to borrow money for a new chapter in your company's history, factor in the method, fees and interest associated with your financing.

 

New Businesses

If your business is young, it can be even more difficult to estimate how much you'll need to handle growth. A common rule of thumb is to try to cover costs through the first six months of business, but it’s a good idea to build in a safety margin even above the 6-month mark.  Here are expense categories you should analyze: 

Payroll – Add up the salaries and wages for yourself, your employees and anyone else doing work for your company. Include sales, human resources and seasonal help. Don't forget the taxes and fees that must be paid to the government and to any associations.

Marketing and Collateral Expenses – Include the costs of signs and business cards, marketing materials, and product or service development.  

Overhead – Estimate costs for your office and operations, including rent or mortgage, supplies, insurance plans and utilities, business licensure, vehicle registration and long-term equipment. Consider all of the necessities you'll have to purchase, even furniture and computers.

Extra Expenses – Talk to someone experienced in your business or ask a mentor for advice. They would be a great resource for information about expenses, fees and pitfalls you may not have considered. Most business owners are willing to help with hints and experiences that will help other people avoid repeating their mistakes. 

 

Established Businesses

If you've been in business for a while, you may be planning to expand your operations. If you want to get a loan or business line of credit, it's important to organize your books and understand where all of your money is coming from and where it's going. Ensure that you'll have enough funding by making a list of your current and future expenses, as well as your sources of income. 

Start with your routine expenses that are part of your monthly budget.

If you're expanding, list any costs involved in additional personnel, equipment, office space and operating supplies. 

For special projects, total the amount of capital needed to fund. Look at supplies, personnel, shipping and transportation.  

Borrowing the right amount of money can help you grow your business without the aches and pain of overwhelming expenses. Once you've mapped out all of your costs and projected your income, you'll have a better idea of how much you need to borrow. While there's no exact science to estimating the right amount of financing, doing your homework will get you closer to a reasonable estimate.

Keep in mind that you don’t have to go through this process alone. The lending experts at Crestmark can work with you to determine the best solution. Give us a call today! 

 

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Seven Questions to Ask Yourself When Testing a Business Idea

by Crestmark 8. April 2013 06:45

Most people have come up with a potential business idea at some point in their lives. After all, the idea is the easy part. Before investing time or energy into a new business, it's important to critically analyze the idea to ensure it will be a smart use of resources. Here are seven things every new business owner should consider before moving forward and getting serious with an idea: 


1. What is the customer profile? There’s no sense in starting a business without any customers, and the better you understand your potential market, the more likely your business is to grow and succeed. The current state of the economy makes it even more crucial to take some time to research your target audience because targeting everyone in general will be too expensive. Who are your potential competitors targeting? You might find they’re missing out on a niche market you can take advantage of once you’re in business.

2. What resources are needed? Understanding the full, up-front cost of a project is vital to ensuring its success. Consider the cost of materials, labor, advertising costs and other expenses. Will the costs outweigh the profits? If an idea isn't financially feasible, put it on hold for a later time.

3. What is the purchasing cycle? The longer it takes for profits to reach the business, the more money must be spent up-front. Understanding your purchasing cycle beforehand will help with budgeting. Once you’ve decided to move forward with an idea, remember—whether your business will have a short cycle like most retail stores, or one that lasts for months: find ways to reach your customers at each point in the cycle.

4. What product or service is this replacing? In order to effectively sell something, a company must convince its customers to buy its products instead of something else. Determine what item customers will be willing to give up in exchange for the service offered by the new business. This will also help when the time comes to advertise the product.

 

sales forecast5. What is a reasonable sales forecast? Determine how many sales can be reasonably expected, and compare this figure against the production cost of the item or service. For example, a restaurant owner might consider the occupancy of the restaurant, the average cost of a menu item and how many people could be expected to stop in on an average day. It might help to review competing businesses to draw estimates from their data. 


6. How much growth potential is there? If you’re producing a hand-crafted item, for example, can it be mass-produced if the demand requires? Services that must be rendered by a skilled individual cannot be produced in high quantities. Leave room for growth, but establish limits early on.

7. Will the idea be viable in several years? Some business ideas seem appealing at first but would not be attractive in the long haul. Before deciding on a new enterprise, an entrepreneur needs to decide if he could be happy at that same business two, five or even 10 years down the road.


Of course, a successful business needs more than a smart idea, but testing each new idea against these criteria will help to create a secure foundation for the business to grow upon. 

 

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