Most businesses operate to some extent on borrowed money. Borrowing too much means you are paying more in interest than you need to. Borrowing too little means you are under financed and may not have enough capital to accomplish what you want to do. That is why you have to work out just how much money you will really need, and when you will need it, before you talk to anyone about borrowing funds for your business. Of course, you will also have to work out how to repay what you are borrowing. Here are just three tips for estimating your borrowing requirements.

Check your business plan

Start by taking a good look at your business plan. It should be an overall guide to both the amount you need to borrow and to the times when funds will be needed. If you don’t have a business plan that tells you this kind of information, create one before going any further.

Consider your vision for the business

Where do you see the business in three years from now? If growth is part of your vision it has to be funded somehow. Usually that means making an investment before you begin to get a return, and timing becomes a critical factor in ensuring your cash flow remains sufficient for business needs. Consider what resources your business will need to reach your vision. People and equipment are always necessary, but do not forget to plan ahead for other resources such as additional warehouse space or outside expertise (legal fees, marketing advice, etc.) that might also be needed.

Model the projected financial position of the business

You need to prepare a financial model of the business that will indicate the effects of borrowing the funds you need. This model should demonstrate that the extra funding injected will improve profitability sufficiently to cover the repayments you will have to make. It should also show clearly that the business will have adequate cash flow at all times until the loan is repaid.

Now you are ready to go to a lending authority and make an application to borrow the money you need. By doing your homework, you will know that you will not be borrowing too much or too little. You can be confident that the business will be able to repay the loan from the income it generates. You may also be more likely to impress the lender and get the loan. For help with business planning, budgeting, and financial modeling, please contact a Simons Bitzer team member.