As the US economy continues to get steam from the Great Recession, businesses are looking for growth capital and as a consequence, commercial banks are start to be IN DESIGN once again. If nearly anything we can make certain of both as consumers and producers in the US, business cycles are a given reality that requires wisdom and discipline to foresee and adequately make for… but more on this in another article. The focus of this article is on having legitimate and profitable reasons for obtaining a business loan. fusionex
In my view as both a commercial banker and business loans consultant, the “purposes” for getting a business loan have been for both ‘good’ and ‘bad’ reasons. Initial things first, debt capital if not leveraged properly becomes a quick and fast way for any business to travel bad. The use of a standard bank loan for people who do buiness purposes is not bad; it is the reason as to why a business owner needs it. In a person’s preparation to obtain a business loan, the amount one question that should get a reasonable response is, ” is it a complete necessity for the business to acquire this loan? inches Put simply, in the event the business does not receive the loan, will this cause any material negative consequences to the business?
Let’s deal with the first observation: what are the good and bad reasons for obtaining a loan? As explained before, business owners turn to get a loan for any every reason under the sun. Primary reasons I actually noticed were for shortage of positive cash circulation or refinancing of existing debt which in more situations than not were personal loans used to finance business expenses (notice here that I would not say EXPANSION). Below is an ironclad rule for having reasonable for obtaining a loan for virtually any business: Ensure that cash stream is positive, stable, and healthy for the not far off future. Debt capital is meant to supplement and grow cash flow, to not replace it. If the business is experiencing cash flow problems then your business owners and/or principals need to dig deep and analyze businesses and industry… not make the condition MORE SERIOUS by getting into financial debt. Next. let’s look at one or two metrics that can help create the right mentality for obtaining a business cash advance.
The first metric we’ll disclose is the return on equity. To get the sake of to not get into any CNBC finance technical vocabulary, let’s preserve it simple: the return on equity metric lets you know if you are making any money to keep as your own in the business. To calculate, take the revenue (if any) remaining after accounting for expenses, and divide this into the amount of money you invested in the business. Expressed as a ratio, the higher the quantity, the better because it states that the business is a money manufacturer. Also, the ROI metric is a great signal whether or not the business is cash moving positively. Remember, profit is nice, but a healthy, positive cash flow CAN BE KING!
The last metric we’ll point out is your debt to fairness ratio. Again for reason of simplicity, the financial debt to equity ratio let us you know how ‘leveraged’ or indebted the business is. To calculate, break down total debt by total equity. The underlying reason this ratio is so powerful is the truth it ‘forces’ the business owner and/or principals to truly ‘know’ and ‘understand’ the debt and value that makes up the business capital structure. A fair share of businesses with high debt to equity levels experience little cash flow levels scheduled to interest and other mandatory debt payments that are by nature set (predetermined repayment schedule). While an eliminate here, do not incur any unnecessary financial debt simply for the sake of incurring it; have a plan that discloses how the business will pay off the debt, but have an improved position fiscally and operationally after repayment.