Lending Library

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

Occasionally, employees come to their employers strapped for cash and asking for a loan.

Lending money to employees may seem harmless, but if not handled correctly, the practice can cause significant problems and disruptions to an organization's operations. Here are a few general comments regarding lending to employees:

Chronic financial problems.

Employees who borrow from their employers generally have chronic personal financial problems. Unfortunately the problem is usually much more severe than the employee will let on, and the employee has come to the employer as a last resort.

Multi-time event.

It generally won't be a one-time event. You want to be kind as an employer, but once this door is opened it is very difficult to shut.

Do some research to ensure the employee has not already attempted or committed fraud against the company. The "Fraud Triangle" identifies the 3 elements generally present if fraud occurs --opportunity, financial pressure, and rationalization. If an employee has come to you for a loan, they are most likely feeling financial pressure. Because of the many and shared responsibilities in a small business, many employees have the opportunity to commit fraud. And, a person under financial pressure and who may be overworked in a small business, can always find good rationalizations for taking "just what's owed to them" from their employer.

Watch employee carefully.

If you decline an employee's request for a loan, make sure to watch the employee carefully. The stresses related to the fraud triangle may have increased by you saying "No," and the employee may get desperate.

Empathy

When an employee comes to you asking for help, this opens the door to a frank, and what can be, healthy discussion regarding their personal finances. Make sure you are well aware of the circumstances that have put the employee in this situation. Your understanding will help you not only make the correct decision, but also help the employee with more permanent solutions. This is also an opportunity for you to evaluate the employee's compensation. Many employees do not know how to ask their employer for a raise, it it may be that they've earned it.

5 keys to lending money to employees:

1. Make sure there is a specific need. Ask your employee to provide a bill or invoice related to the money they are borrowing. This helps the employee understand you are helping them with a specific need and not just dolling out money.

2. Limit the number of times employees can borrow. Limiting the number of times an employee can borrow accomplishes two goals: First, it encourages the employee to fix the financial problems in their personal life because you've eliminated a crutch for them to turn to. Second, you limit the potential personnel problems that can accompanying employee lending.

3. Charge interest. Employees may come to an employer because they won't have to pay interest like they would at a "payday loan" company. A common action by those in personal financial difficulty is to seek out lending sources with the "cheapest" money. By charging interest you show your employee your company's money is just as valuable as that of anyone else, and you avoid employees taking advantage of you. Make sure you abide by any related state laws.

4. Require employee to sign a note with repayment terms. For the safety of the company, and to ensure the employee understands the severity of borrowing from the company, formalize the arrangement by drafting a note payable to the company and require the employee to sign it. Make sure to include the repayment terms, interest rate and actions if employee defaults.

5. Draw a hard line from the beginning. Whatever your stance on lending to employees, you will be better off if you define the boundaries in which you will lend and stick within them. Employees in desperate financial situations will become like children; they will push the boundaries to get as much as possible. As a good parent would do, employers need to stand firm and act in a way that is best for the employee.

6. Follow through on your side of the agreement. If the employee defaults on the agreement, follow through on the default terms specified in the note signed by the employee. These actions may include automatic deductions from the employee's paycheck or legal action if the employee has quit.

7. Don't overestimate loyalty. A person in financial distress may do irrational things. The employees who can do the most damage and cause the most pain are those you feel are most loyal.

8. Don't do anything that will jeopardize your company or other employees. This needs no more pontification.

In our role as employers it is sometimes difficult to make hard decisions that are more beneficial for the employee than he or she may realize. Again, it's like being a parent. When you involve an employee's personal financial matters, it gets even more complicated. It's always best to err on the side of what benefits the overall business and what is best for the employee.

Business owners: Have you ever loaned money to one of your employees? Employees: Have you ever asked for a loan from your employer? If so, please share your experience:

With the onslaught of natural disasters that have occurred over the past few years, many businesses have suffered the loss or damage of assets, and more. These physical and economic damages have caused many businesses to have to shut their doors, or reduced their production and output.

To help combat some of the problems for homeowners, renters, and businesses -- both private and non-profit -- the SBA provides low-interest disaster loans to help repair or replace real estate, property, machinery, equipment, inventory, and other business assets that may have been destroyed or damaged by a declared disaster.

SBA has disaster offices throughout the country, where they provide low-interest, long-term loans. There are a variety of SBA loans, including:

• Home and personal property loans- These loans are available to those in declared disaster areas, and those who are known as the victims of a disaster. Even though they are from the SBA, you do not have to be a business to get them.
• Business physical disaster loans- Any business or private, non-profit organization located in a declared disaster area that incurred damage during the disaster can apply for a loan to help replace or repair the said damage.
• Economic injury disaster loans- This is a loan for small business or private, nonprofit organizations that have suffered economic injury, even if they did not suffer physical damage, due to a declared disaster.
• Military reservists economic injury loans- These loans are only for eligible small businesses to help them meet ordinary and necessary operating expenses that it could have met, but are now unable because an important employee was called into active duty because of a disaster.

The loans that are of greatest importance to businesses are physical disaster loans and economic injury disaster loans. Here is a little more information about said loans:

Physical Disaster Loans

• Businesses of all sizes and private, nonprofit organizations may apply.
• Loan amounts can be up to $2 million.
• Loans must be used to repair or replace damaged real estate, equipment, inventory and fixtures.
• Loans may not be used for expansion unless required to be up to code.
• The loan may be increased up to 20% of the total amount of disaster damage (verified by SBA) to prevent future damage by disasters of the same type.
• Loans are to cover under-insured loses or uninsured losses.

Economic Injury Disaster Loans

• Small businesses, small agricultural cooperatives and certain private, nonprofit organizations of all sizes that suffer from substantial economic injury may be eligible to apply.
• Loans may be up to $2 million.
• Loans may be used to meet necessary financial obligations that they would have been able to pay had the disaster not occurred.

For both loans, interest rates won't exceed 4% if the business does not have credit available elsewhere. The repayment term may be up to 30 years, and will depend on the business's ability to repay. If the business has credit available somewhere else they interest rate won't exceed 8%. The loans may be applied for directly to the SBA, at which time the SBA will send out an inspector to estimate damage, if the loan is awarded, funds may only be used under the stipulated SBA guidelines.