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A survey done by the National Federation of Independent Business (NFIB) showed that record-breaking levels of small businesses are experiencing growing profits and, in turn, investing significantly more money into investing, hiring, and continued growth.

Small businesses are making a number of capital investments, such as purchasing new equipment and vehicles, as well as improving their infrastructure. Many other industry experts predict that small business startups will continue to rise.

Inspired by the success of their peers, entrepreneurs across the country are  springing into action and starting their own businesses. But 30% of new businesses fail during their first two years. About half fail within the first five years.

These figures may seem intimidating. After all, starting a new business is expensive, and you may be putting up your life savings to get it going.

But you shouldn’t be afraid. If you're interested in starting your own small business, here’s what you’ll need.

1. Time

Many businesses fail within their first year because the owners can’t invest enough time in their business. In a market saturated with small business owners, the competition is fierce. Time is one of the most important things you’ll need to create a business plan that will make your enterprise successful.  

2. Money

As a business owner, you’ll need enough cash to hit the ground running. If you don’t have the financial resources you need, you will have to be willing to take out a loan or get a credit card to start funding your business. If you have a solid business plan, the time you need to devote yourself to your business, and the courage to make it grow, you shouldn’t fear taking out a loan.

There are lots of things a small business loan can help you cover costs for:

• Advertising, including a website or business cards
• An accountant or accounting software
• Point of Sale processing equipment
• Licenses and permits
• Business insurance
• Retail, office, or warehouse space
• Legal fees
• Equipment including appliance, office furniture, and machinery

3. Patience and Confidence

The bottom line is that as an aspiring entrepreneur, you need to be patient and confident. There may be things you have to deal with, such as stagnant profits, the loss of money, regulations to adhere to, and more. The overarching point is that staying in the game is worth it. Being patient and having confidence is what it's going to take to make your business succeed.

4. Information and Research

Another thing to research is market trends. You may think you have a brilliant idea, but unless you do research, there’s no way of predicting whether your idea will be successful. You’ll also want to research costs that you’ll need, such as raw materials, space, employees, and everything else that goes into running a business.

The Final Word

It’s a new year, and you know what that means: it’s a great time to consider planning for financial success in 2019.

You probably don’t relish thinking about tax time, but this year’s tax season could be a game changer for your business, bringing with it some new opportunities to save money. Significant alterations to Section 179 were made in the Tax Cuts and Jobs Act (TCJA) of 2017 that can lead to improved cash flow, and that means more funds available for your company.

There's good news in the bonus depreciation allowance, too, with an increased depreciation rate that can be claimed sooner. Both these measures allow you to deduct the assets you need for business activities more quickly and for higher amounts than you could before.

It’s always a good idea to review your options thoroughly before you file taxes. You could find new opportunities for the growth of your business in the fine print. Here’s what you should know about Section 179.

Section 179

Section 179 was first established in 1958, with the intention of stimulating small business investment in goods that benefit the business, simplifying accounting, and reducing the tax burden.

In order to qualify for the deduction, you must use the goods for business for a minimum of 50 percent of the time. The cost of the goods can be deducted in the tax year the goods were “placed in service”—that is, ready to be used in the business.

Under TCJA, the list of assets that are eligible for Section 179 deductions has been expanded and the maximum deduction has been increased, along with the spending threshold.

You might find differences between your local authority and the IRS when it comes to definitions of tangible personal property and real property. Remember that qualifying property for the Section 179 deduction is defined by the IRS and not controlled by local law.

The IRS provides a complete list of qualifying property in Publication 946.

Tangible Personal Property

Tangible personal property is defined by the IRS as tangible property that is not real property. Examples of tangible personal property include fixtures inside or attached to a building, such as refrigerators, office equipment, printing presses, testing equipment, and signs. Numerous improvements to the interior, roofs, heating, security, and fire protection are also acceptable Section 179 expenses.

Machinery and equipment used for manufacturing, production, or extraction, or to provide transportation, communications, electricity, gas, water, or sewage disposal services are considered tangible personal property. Research facilities needed for business activities qualify for the Section 179 deduction, and air conditioners and heaters put into service after the tax year 2015 are also eligible.

Livestock qualifies for Section 179, as well as single-purpose structures for livestock and horticulture. Facilities used in relation to distributing petroleum or primary products of petroleum are also allowed.

Another potential deduction is off-the-shelf computer software purchased and put in service from 2003 and forward

Real Property

Certain property placed into service in the tax year can be treated as Section 179 property. Qualified real property includes certain leasehold improvement property, qualified restaurant property, and qualified retail property.

Generally, the property must be non-residential and meet requirements set out in the Internal Revenue Code. The IRS provides detailed information in "Special rules for qualified section 179 real property" in Publication 946.

Section 179 Limits

Section 179 is subject to two limits: an investment limitation and an income limitation.

Investment Limitation

You can deduct up to $1 million of qualified expenses per year, purchased and placed in service for your business in 2018 and following tax years. A dollar-for-dollar phaseout begins when expenses for the year exceed $2.5 million to a limit of $3,500,000—Section 179 deductions stop at that threshold amount. Both amounts are indexed to inflation.

Investment limitation amounts cannot be carried forward for future tax years.

Income Limitation

Section 179 deductions are not allowed to exceed the taxable income of the business, including wages and salaries. The limitation is calculated after the investment limitation. For example, if the taxable income of your business is $50,000, and qualified expenses total $75,000, Section 179 deductions are limited to $50,000.

Allowances that can't be used because of the income limitation can be carried forward indefinitely.

Bonus Depreciation Allowance

When you have exceeded the limits for Section 179, you're able to recover capital expenses for your business over a longer period and at a slower rate, by claiming depreciation deductions under Section 168(k), referred to as bonus depreciation. A few changes have been made to this allowance, too.

The Bonus Depreciation Allowance (BDA) applies to used qualified property now, as well as new acquisitions. The depreciation limitation has also been accelerated in the TCJA to temporarily allow you to deduct 100 percent of such purchases for the same year.

The cost of goods placed into service from September 28, 2017, through to the end of 2022 is eligible. Starting in 2023, the percentage for depreciation is scheduled to decrease in increments, down to zero percent by 2027 and after.

Though both Section 179 and bonus depreciation are available in the same tax year, claims must be filed in the right order. Claim Section 179 allowances first; then you may proceed to claim bonus depreciation for the amount that remains.

By accessing deductions under Section 179 and the bonus depreciation allowance, you could potentially deduct nearly all the expenses incurred for qualified acquisitions for the tax year—as long as the deductions are claimed appropriately.

Start the Year Right

Beyond researching Section 179, there’s a lot you can do at the beginning of the year to set yourself and your business up for financial success. Stay on top of all the changes to the tax laws, key tax dates, and other essential financial tasks with this Q1 financial planning checklist.

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This guest article was contributed by Irene Malatesta of Fundbox. Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Very few e-commerce businesses survive beyond their first few years. Analysts peg the failure rate of online stores anywhere between 80 to 97 percent. There are several reasons contributing to this. For starters, e-commerce is highly competitive but has a very low barrier to entry. This attracts a lot of non-serious players to the business who close down at the very first hurdle. More significantly, financial mismanagement plays a critical role in the closure of many well-funded e-commerce stores.

This is ironic because one of the reasons e-commerce businesses are so lucrative compared to brick-and-mortar stores is they have fewer liabilities. Online stores can make do with small office spaces and very little inventory, and this is a big draw for many entrepreneurs. So why do so many e-commerce stores struggle financially?

A Primer on Working Capital

Working capital is similar, except it is the difference between all your assets and liabilities in a financial year. If all your assets (properties, inventory, income, etc.) totaled $500,000 in a year and you spent $400,000 of it to pay off loans, salaries, and rent, then you have a surplus of working capital.

Here is the tricky part. By definition, working capital does not include your liquid cash. If you face a deficit of $20,000 that needs to go into paying the mortgage, it is not realistic to sell off your property to meet the deficit. However, liquid cash or inventory that can be quickly liquidated may be used to pay this off. A business only has high working capital if there is sufficient liquidity in its operations to meet any of its immediate expenses.

What E-commerce Businesses Do Wrong

On paper, inventory is listed as an asset; you can liquidate inventory just like your property or equipment. In practical terms though, this may not always be the case. For one, inventory can be a depreciating asset (technically, called “current assets” since the value changes with time). If you sell phones online, the value of your inventory may go down each time new models launch in the market.

It is worth noting that inventory is not a capital asset. A manufacturing plant or equipment is necessary to build a product, and hence vital to your business operations. This is not true with inventory which is essentially your liquid cash converted into a depreciating asset. If you do not convert your inventory back into liquid cash by selling it, you'll potentially lose money over time.

In other words, the more inventory you hold, the more vulnerable your working capital.

Vendor terms can also wreck your working capital situation. Let's go back to the example of an online store selling phones. This seller may procure $100,000 worth of phones from a vendor with a 60-day credit period. To maintain the current working capital, the needs to sell these $100,000 worth of phones within the next two months to pay the vendor back. If it fails to sell the phones, the business could be staring at a deficit which needs to be recovered by selling off other assets. Alternately, the business could procure a short-term loan to pay the vendor, but this does increase liabilities for future months. It is a healthier financial habit to use small business loans for capital purchases rather than paying off liabilities.

Bad vendor terms can mean only one thing for e-commerce owners—digging deeper into a hole trying to meet financial obligations.

How to Improve Working Capital

Reduce inventories. Inventories are a depreciating asset and a ticking time bomb. Holding too much inventory could put your business under greater pressure to sell, forcing you to try strategies you may have not executed otherwise. For instance, you may want to increase your advertising spend in order to liquidate your inventory assets faster. If your ads do not work out, not only do you continue to own the inventory, you also stack up more liabilities to your advertising partner.

Change the business model. Depending on your industry, you could look at changing your business model. A made-to-order product can allow your store to charge higher prices for a bespoke design. At the same time, you also get to sell your product before paying your vendor for the manufacturing. If that does not work, you may also look at dropshipping. With a dropshipping business model, you pass on the responsibilities for order fulfillment to your vendor. This way, you do not hold any inventory at your end and also get paid before you pass on the vendor’s share.

There are a few challenges with this model, however. Dropshipping can increase the shipping time of your product (especially if your vendor is from another country like China), and can bring down the user experience. While that is a cause for concern, it is still better than shutting down your store or filing for bankruptcy. There are other ways to deal with long shipping times.

Update vendor terms. Bad vendor terms are one of the biggest causes for poor working capital among e-commerce businesses. Each product goes through its own unique sales cycle. The time it takes for a customer buying a dress online is much shorter than it takes for one to buy a smartphone or a TV. At the same time, it costs more to hold an inventory consisting of electronics compared to apparels. Consider these factors before agreeing to your payment terms.

Establishing a healthy cash flow and working capital is paramount for any business, not just e-commerce stores. Consider hiring an advisor to assist you with managing your finances. As any successful entrepreneur will tell you, while these advisors are a liability on your balance sheet, they are one of the most important assets you can have.

As entrepreneurship continues to expand across America, many who have caught the small business bug are desperate to find a profitable field to make their mark. A recent study released by Sageworks ranked small business industries according to their profitability. The overall winner was financial services, with accounting, tax prep, bookkeeping, and payroll processing coming out on top with an 18.3% growth in sales this year.

Rising Trend: Accounting and Legal Firms

Accounting firms have a number of built-in benefits that make them perfect for small business. They are low-cost enterprises, requiring little capital to get started. All firms really need are trained employees who can crunch numbers. There are no inventory costs and, with the rise in popularity of coworking spaces, finding office space is much more affordable.

Accounting is not the only field, however, that has these built-in benefits. Legal firms also lack inventory costs and require only well-trained employees. The legal services field saw a 17.4% growth this year.

Legal firms can rake in significant sums of money depending on their specialty. The highest paying legal fields at the moment are litigation and intellectual property. Litigators handle high-dollar, high-profile, and high-stakes cases that usually end in large settlements.

Intellectual property law protects ideas: patents, copyrights, trademarks and other profitable concepts. As technology innovations continue, the demand for patent lawyers increases. Because of this, intellectual property law is also the fastest-growing sector in the law field.

Other Highly Profitable Industries

While accounting and legal firms made the largest profit strides this year, they aren’t the only industries on the rise. Here are some other profitable industries from the Sageworks study:

• Lessors of real estate: 17.4%
• Management of companies and enterprises 16%
• Outpatient care centers: 15.9%
• Offices of real estate agents and brokers: 14.8%
• Offices of other health practitioners: 14.2%
• Offices of dentists: 14.1%
• Specialized design services: 12.8%
• Automotive equipment rental and leasing: 12.5%
• Activities related to real estate: 12.3%
• Warehouse and storage: 11.6%
• Offices of physicians: 11.5%
• Nonmetallic mineral mining and quarrying: 11.2%
• Medical and diagnostic laboratories: 11.1%
• Other schools and instruction: 10.5%

The Least Profitable Industries

• Oil and gas extraction: -7.6%
• Support activities for mining: 0.6%
• Beverage manufacturing: 0.8%
• Grocery and related product merchant wholesalers: 1.9%
• Lawn and garden equipment and supplies stores: 2.0%
• Miscellaneous durable goods merchant wholesalers: 2.3%
• Petroleum and petroleum products merchant wholesalers: 2.4%
• Grocery stores: 2.5%
• Automobile dealers: 3.2%
• Building material and supplies dealers: 3.2%
• Continuing care retirement communities and assisted living facilities for the elderly: 3.3%
• Other motor vehicle dealers: 3.3%
• Home furnishings stores: 3.3%
• Furniture stores: 3.4%
• Beer, wine, and liquor stores: 3.4%

Many of the least profitable fields have huge inventory and overhead costs. The Sageworks study qualifies their research by saying, “not all private companies are necessarily shooting for high profitability; maybe their industry is price sensitive and relies on volume for growth or maybe they are sinking profits back into the business for R&D.”

Nevertheless, profitability is an important consideration for entrepreneurs, and is a good indicator of potential success. If growth in the aforementioned industries continues, there will be significant upticks in small businesses seeking opportunities in those fields this year.

Ever feel like big businesses have too much money and power? They do. But there’s one thing they don’t have that you probably do: happy workers.

Small Business Employees Are the Happiest

A recent report found that people working in firms with 10 or fewer employees have the highest happiness levels, while organizations with 10,000 or more employees report the lowest. Likewise, 43% of small business workers say they feel happy at work while only 27% of their peers at large businesses report the same.

If that’s not enough to prove that big business is losing the happiness game, consider this: 95% of small business employees say that at least some of their happiness is due to working for a small business. Of that percentage, 39% attribute most of their job satisfaction to working for a small business.

The discrepancies between small and big business satisfaction widen every year. In fact, small business optimism is currently the highest it’s been in 43 years. Because of this, small businesses enjoy the benefits of having employees that actually care about their work.

So why do small businesses have the edge over the big guys?

Small Businesses Appreciate Their Employees More

• Being appreciated (67%)
• Having a flexible schedule (27%)
• Seeing the fruits of their labor (23%)
• Feeling like their input matters (17%)
• Being rewarded for hard work (14%)
• Getting noticed by people who matter (9%)
• Broadening their skill set (6%)

Why? Because small businesses have less bureaucracy and more authentic human interaction. This leads to tight-knit communities of professionals who support each other in achieving common goals. In other words, small businesses help employees feel needed and appreciated when they’re at work instead of leaving them feeling like a small cog in a giant machine. 

And there's more: happy employees lead to happy bosses. In fact, happy workers:

• Are 12% more productive
• Have more active and creative minds
• Are more willing to collaborate

Whether you’re just starting a business or you’ve been in business for years, you’ve probably asked yourself this question: “Should I get a small business loan or find an investor?” The short answer is, it depends. There are a lot of factors that go into play when making that decision and each decision has the potential to forever change the course of your business. Don’t make the decision lightly. Here are some of the biggest pros and cons of each route for you to consider.

Business Loan

Getting a business loan can be a viable option for those who prefer a straightforward path to funding, without relinquishing company control. However, like any financial decision, it comes with its own set of considerations and implications.

Pros:

• You maintain sole ownership of your business: The nice part about getting a business loan is that no one else gets a part of your business. You borrow money from a lender, pay them back, part ways with the lender, and at the end of the day, you still own 100% of your business.
• You maintain sole decision-making rights for your business: When you own and operate 100% of your business, you can do whatever you want with it. Want to change your menu or start selling a new line of something? Great! Go right ahead. A business loan allows you to make whatever decisions you want, no matter how crazy or unorthodox.
• You retain all the profits you make: Say you’ve had a killer year and your revenues are through the roof. Everyone wants results like that, right? Of course! And when you own your business outright, you get to keep every last penny of the profits you make.
• You build credit: When you get a small business loan, you are simultaneously building your credit. Were you only able to qualify for a small amount and hit with a high interest for your first loan? Once your current loan term is up (assuming you’ve made timely payments), you will have built your credit and increase your chances of getting a larger loan with lower rates the next time around.
• Shorter-term than an investor: If you have an immediate need that will likely be fixed or solved in a short period of time, a small business loan is absolutely the way to go. Even if your loan term is 3-5 years, once that timeline is up, you own your business free and clear. Investors are in it for the long haul and will likely be around as long as you are in business. It’s not worth it to give up a portion of your company if you only need short-term assistance.
• More predictable: If you want finances you know you can count on, you are actually safer with a business loan. Why? Because if you take out a loan for a certain amount, you can count on that money to help run your business. A lender can’t back out of a loan. Sure, they require payments and if you don’t pay, they will cash in on collateral or whatever else you put up to secure the loan. But as long as you are in good graces with the lender, they’re not going to change their mind. An investor on the other hand, can decide one day that they are no longer interested and take their financing with them.

Cons:

• You are charged interest: Yes, that pesky thing called interest that we all despise. Yet, it’s a necessary evil if you want to secure funding for your business endeavors.
• Monthly payments are required: Rain or shine, your payment WILL still be due on the due date and there is no negotiating around that. Whatever terms you agreed to with the lender are the terms they will hold you responsible for, so if you have a tough month and don’t have enough to make your payment, the lender isn’t invested in your business so they won’t care. All they’ll want is your payment and they will do whatever they can to make sure they get it.
• You may have to put up collateral: If you are a newer business or a startup, you may not have enough credit built up to secure a loan based on merit and credit alone. In this scenario, lenders will often require you to put up collateral that is worth the value of your loan, to protect their interests in the event that you don’t pay. If your business doesn’t have much in terms of collateral, you’ll likely have to put up personal assets such as your house or a car.
• You risk losing your business and personal assets: When you take out a small business loan, you are responsible for that amount and that will never change. Depending on how you set up your business, there is a very likely chance that if you don’t pay they can not only liquidate your business to cover your business debt, but they can also come after your personal assets as well. This is why many small business owners choose to become an LLC - to protect their personal assets.

Investors

Shifting our focus to the other side of the coin, let's delve into the dynamics of securing funding through investors and the associated pros and cons it brings to your business.

Pros:

• You typically don’t have to repay the money – even if your business fails: If you’re just starting your business and you need cash in order to start but don’t have enough business credit to secure a small business loan, an investor can be a great idea. They will provide you with the funds needed and won’t require you to repay it either! Investors realize that there is always a risk associated with investing in a new company. So, unless it is explicitly stated in your contract with the investor, if your company fails, you are not responsible for any repayment.
• No interest or monthly payments: When an investor gives you money for your business, there is absolutely zero interest you have to worry about, and no monthly payments either. It is definitely a lot nicer to not have to worry about if you will have enough to make your payment for the month.
• Advice from investors may help your business: If you’re new to running a business, the advice and mentoring of an investor can prove to be invaluable. Investors have typically “been there, done that” and they know the pitfalls to avoid as well as tips and tricks. If you want immense amounts of help along the way, this may be a great option for you.

Cons:

• You have to give up a share of your business: Investors don’t typically give businesses money out of the goodness of their hearts. They do it because they see a chance at a bigger return than their initial investment. They invest in a company because they see that the business may be going places and they’re placing their bet on that success. This means that they want a piece of the action: your company. If you use an investor, they will usually require a portion of your company in the form of equity. Be careful how much of your business you give up to investors. If you give up too much, it’s no longer your
• Investors now have a say in how you run your business: If you know what you’re doing and have a clear vision of how to get there, you likely won’t be able to execute your plan exactly. Because investors have money invested in your business now, they want to make sure they see that return. This sometimes means that they will dictate how you run your business based on their own experience. This can become cumbersome and frustrating, especially if you started your business to be your own boss.
• Too many investors and you may end up getting kicked out of your own business: If you give up too much equity in your company, you will no longer be the primary shareholder. That means that all the other shareholders combined hold the majority of your business. If you get to that point, they could very easily vote you out of your own company!
• Share of profits: While you may not have to worry about interest payments on a loan, you do have to worry about sharing your profits here. If your business isn’t making much yet, then this may not seem like that big of a deal. But once your business really starts to take off, suddenly the interest rates of small business loans begin to sound very appealing. Depending on your revenue, the amount you end up having to pay to shareholders runs the risk of being far higher than any interest payment.

Choosing between investors vs loans

The important thing to remember is that there is no wrong answer. Whatever direction you choose is entirely up to you and your immediate needs. If your needs are short-term, you are almost always better off with a small business loan. But if you want ongoing funds with lots of advice and you’re willing to relinquish part of your business for it, investors may be your best bet. The most important thing is that you are happy with your business and have the funding that you need to grow it!

The food truck craze has been taking the world by storm lately. It can be a great way to be your own boss and set your own hours, but knowing how to start a food truck business is often the biggest roadblock for many. To try and help ease that burden and encourage you to follow your dreams, we put together a list of 6 basic tips to get your idea off the ground and on the road to reality.

Officially Become a BusinessJust because you are a mobile business doesn’t mean that you are exempt from all of the typical expectations. Get licensed. Create a business plan. Get a truck permit.  Plan where you will park your food truck. Get a food handler’s permit. Get insurance. Every city will differ slightly on their requirements, so make sure you look up ALL requirements that your city may have to make sure you don’t accidentally forget to check something off of the list.

Learn Your City’s GuidelinesYou can’t just set up a food truck wherever you want, whenever you want. Many cities have a maximum number of food truck permits they will issue at any given time, so make sure you are able to obtain a permit before purchasing a truck and investing your entire life into your endeavor. One food truck owner in New Orleans ran into this predicament and worked with her City Council to increase the permit number from a mere dozen to 100! If there are no more permits available in your city, don’t lose hope – consider working with your City Council to change the restrictions.

Determine What You Will SellWhat type of food truck do you want to be? What type of food do you want to make and sell? It’s great if you love tacos, but how will tacos differentiate you from the dozens of other food trucks around you that sell tacos? Do you want to do some type of fusion experiment between two different food types? Try writing down all the different food ideas you have, whether they’re connected or not. Once you’ve got a full list, see if there are any unique combinations you can make with the items you singled out.

Get FinancingUnless you are lucky enough to have a rich uncle leave you his estate, you will likely need to secure financing to start your mobile food truck business. First, determine exactly how much you will need. On top of other expected expenses, a food truck can be anywhere from $20k-40k to $100k-200k, so make sure you’ve done a detailed analysis of your expected costs.

Consider getting a small business loan through the SBA. The SBA does not fund your loan, but they do guarantee at least a portion of your loan. This mitigates the risk so banks and alternative lenders feel more secure in financing your business.  Though an SBA loan is one of the most popular options, there are plenty of other small business loans available to you that you can pursue here.

Get a TruckNow comes the fun part – getting a food truck! Make sure it has all the equipment you will need to cook your food(s) of choice, or that it has the capability to be custom fit to fill your needs. Keep in mind, if you plan to prepare food on site, you will need a much bigger truck than if you intend to cook elsewhere and bring the food in warmers.

Market ItIt’s a blessing and a curse to be a mobile business. The great thing is that you can take your food truck wherever you want, to whatever function you have permission to be present at. However, this can also make it more difficult to develop a regular customer base. Because of this, marketing your food truck is absolutely essential to your success. Start a Facebook page, Instagram, Twitter, and whatever else you feel will be beneficial to your budding food truck. Post where you will be and when. Consider posting certain specials for your loyal followers, or a discount for referrals. Ultimately, do whatever you can to make sure people know about you and how to find you.

Running and operating a food truck can be very rewarding and exciting. It may be an uphill battle in the beginning, but don’t let the bureaucracy of your city keep you away. Take these basics of how to start a food truck business, and set a plan in motion to get your business off the ground and onto the streets of your city. We’re rooting for you!

You know that your company needs a business loan, but how much should you borrow? Should you base the amount on the needs of a project? On your revenue? Your profits? Financial projections? It’s important to take a variety of factors into account when looking for financing for your business. Here are a few.

1. How much money your business needs

It’s very important to determine the correct amount of money that your business needs, because if you ask for too much, lenders will question your ability to repay them, and if you do not ask for enough, you will have trouble funding your business. To find out how much money your business needs, you should create detailed costs projections for the use of borrowed funds. You should also prepare financial projections, including profit & loss and cash flow statements to estimate the revenue that you will generate by taking out a loan, and your costs. Doing this will not only help you determine the amount of money that you need, it will also show lenders that you are responsible and informed.

2. How much your business can afford

Making sure that you can make payments on the business loan is paramount. Lenders evaluate a company’s available cash to pay back a loan in a given year, which they call debt service coverage ratio (DSCR). To calculate your DSCR, you need to know your cash flow (how much money comes in and how much goes out), and the amount of money you’ll have left to make debt payments.

Many lenders also look at the borrowers’ personal finances, using a term called DTI (debt to income ratio), which calculates your total monthly income and monthly debt, including car payments, mortgage payments, credit cards, and other debts. Most lenders prefer that borrowers’ personal debt makes up no more than 36% of monthly income.

3. The costs of your business loan

What closing costs are there? What is your interest rate? What is the total amount that you will pay back? These questions all factor into how much you can and should borrow. Knowing the total costs of a loan can help inform you about the type and amount of financing that you should pursue.

4. The impact of your loan on your projections

How will the influx of money influence your future revenue projections? How much profit can you expect to make by taking out a loan after factoring in the loan’s costs? If you borrow more, will you make more as well? Calculating this can help you determine the optimal amount to borrow.

5. Future financing needs

Does your business plan call for future expansion that will require financing? If so, will taking out a smaller loan now and repaying it help you build your credit to secure a larger loan in the future? Is it necessary to take out a loan now to reach the point where you can meet your plans for future expansion? Or, if you borrow too much now will your debt from that loan get in the way of securing financing at a later date? By planning ahead, you can make informed decisions about financing your business now, and into the future.

Lendio’s small business loan calculators can help you gauge the level of financing that you need and compare loan types from many lenders.

Sources:

http://www.forbes.com/sites/aileron/2014/10/02/7-steps-to-getting-a-business-loan/#75e5270921e5

http://www.businessnewsdaily.com/6237-small-business-loan-calculaitons.html