How Much Capital Do You Really Need To Borrow
If you run a small business, you might be interested to know how much loan you are supposed to borrow. Due to lack of sufficient financial among small business owners, they usually face challenges determining how much small business loans to take. There is always the risk of borrowing too little, which will not allow you to stimulate the growth of the small business to the point where you would be interested in reaching. Also, borrowing too much loan could end up ruining your small business. A huge loan has the potential of digging into your personal finances as you pay off the debts. You could also fall into bankruptcy by taking a huge loan.
For the small business owners, they have something to smile about since there is a formula that they can use to calculate the right loan amount for their businesses. This is a mathematical formula which determines the debt service coverage ratio, DSCR. This ratio is meant to tell you whether you can manage to take a small loan while your business is operating smoothly. The formula can also be used by financial institutions to determine whether your business qualifies for the loan you are interested in. The DSCR determines whether there is sufficient cash flow in your business by simply comparing the money flowing in and out of business. Before you can calculate the DSCR, you need to have the correct numbers to be used in the calculation.
The debt service coverage ratio aims to compare the money in hand, which can be used to pay a loan in one year to the amount of money you want to borrow plus the interest in one year. To determine how much cash in hand will be available at the end of the year, you’ll need to take the money in hand at the beginning of the month and add the amount of money that your business will have gained at the end of the month. By making this calculation, you will know the amount of total cash that your business will have at the end of one month. You need to subtract the amount that leaves your business in the form of expenses from the total cash recorded in the previous calculation. Whatever you’ll get is the total monthly cash flow for your business.
Simply, the monthly cash flow is determined by taking the money available at the beginning of the month, adding the money that got into the business by the end of the month and then subtracting the expenses of that month. Many lenders will be interested to know your monthly cash flow before they can approve your loan request. By taking the monthly cash flow and multiplying it by 12 will give you the annual cash flow.
The second part of calculating your DSCR involves determining how much money you need to borrow and the interest rate it will incur. By making this calculation, you will be in a position to know how much you owe the lender at the end of the year.
If by the end of the year your business gained $120,000 and you acquired a loan of $100,000, the DSCR will be calculated by dividing $120,000 by $100,000 which will give 1.2. To know whether your business can be in a position to pay for the loan, your answer needs to be somewhere between 1.15 and 1.25. Delancey Street is a business lending organization that has business funding programs that are aimed at helping small businesses owners to access funding while at the same time operating smoothly. They offer loans that are very different from traditional bank loans. Delancey Street has eliminated all the generic lending terms that people are used to in traditional bank loans. For instance, no fixed amount needs to be paid or fixed interest rates. Delancey Street has designed its programs to take into account the revenue collection by the borrowers. They will charge a certain percentage of the income that is not necessarily a fixed amount that does not take into account the inconsistency in revenue received.