How Much Is Enough to Borrow for Your Business?

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.

Financial Planning and Review of Year End Reports

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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