As the small business owner and borrower, you are responsible for identifying the amount of money needed for specific purposes. Generally, the needs of your business will fall into two broad categories:
- Expansion Capital – Used to finance business growth
- Working Capital – Used to finance short term business cash needs
The first category is considered a permanent investment in the business, which means funds will be repaid to the lender over a period of time greater than one year. Working capital can be of a seasonal nature and repayable in less than one year according to the seasonal sales and cash flow patterns of your company. Permanent working capital may be a requirement, especially if your goal is to commit funds to a permanent buildup in working assets (accounts receivable and inventory) in support of sales growth, introduction of new product lines, or territorial expansion.How much should you borrow?
Determination of the loan amount may be a straightforward process, especially when the loan will be used to finance assets which can be readily quantified, such as land, buildings or equipment. If your business needs working capital or funds to build inventory, accurately pinpointing the amount you need to borrow can be a greater challenge. Talk with an experienced TDECU lender today. We can refer you to a reputable third-party advisor who can assist you with this decision.In either case, even if your business has a successful performance history, it is important to develop projected financial scenarios (preferably with help of a Certified Public Accountant) to justify the amount you seek to borrow. A good rule of thumb is to prepare balance sheets, income statements (at least 2 years) and cash flow projections (monthly for one year). The lender will want to carefully evaluate your historical performance as well as projections.