Whether you’re looking to expand or just need a quick cash injection, determining if you have the resources to make your loan payments is something you should definitely look at yourself, even before approaching any potential lenders. But figuring this out can get a bit tricky, particularly if it’s your first small business loan!
Think Like a Lender
Before you start anything, you’ll want to take a step back and think about the loan process from a lenders point of view. Use our business loan calculator and start asking yourself these questions:
- What are my business’ finances like?
- Can and will I be able to make repayments?
- What if I can’t repay the loan?
If you can answer all of those questions then lenders are going to love you!
Cash Flow, Cash Flow, Cash Flow
Ok it’s not all about cash flow but it’s definitely a good place to start! Both banks and alternative lenders look at several things when determining if a business is a good candidate for a loan. Looking at the ratio of cash flow to debt that a business has is one of the most common tools and isn’t super difficult to figure out.
Cash flow is usually reported monthly but can be measured weekly or annually. Start by calculating the cash moving in and out of your business over a given month. Your cash-in will include everything from sales, paid receivable and interest and can also include your starting monthly cash. Add this to any expenses (cash-out) for the month and bam; you’ve got your monthly cash flow.
Once you’ve got this number, compare it to any estimated loan repayments to get an idea as to how much you could be eligible for. While it is hard to determine exactly how much you’ll end up receiving from a lender, this is a good way to get some rough estimates.
Find out more in Cash Flow Management: Why Is It Crucial for Business Success?
How's Your Track History?
Figuring out your cash flow is all well and good but it’s not the only thing you need to tick off on a loan application. Lenders will also look at whether or not your business has any other outstanding debt and factor that into eligibility. If you have previously had a loan, credit card or any other kind of debt, lenders will also check that you repaid those on time and in full – if you did that’s another massive tick!
Most of this information will be on a credit report that a lender will request upon your application. However, banks tend to put more of an emphasis on credit scores and reporting than alternative lenders. Non-bank lenders will focus more on business data and cash flow!
Worst Case Scenario
Ok, let’s say something catastrophic happens and you can’t pay back your loan, what happens then? Well, it differs from lender to lender but you should still probably have a backup plan.
For banks, this backup plan commonly comes in the form of collateral. When taking out a loan a bank will require the borrower to put up collateral (usually in the form of property) as security should you fail to repay the loan.
For unsecured business loans, like the kind offered by most alternative lenders, you won’t have to put up your house to take out a loan. Instead lenders will just take a personal guarantee, so that should something happen to the business, you will still engage in the repayments personally.
At Moula, we won’t lend you more than we think you can afford to pay back. It’s not good for either party if you default on payments – you don’t want extra debt hurting your bank account and credit score and we don’t want to be chasing up loan repayments! We’d much rather see a business grown from a suitable business loan than fall behind in payments.