While the US economy continues to pick up steam from the big recession, companies are looking for growth capital and, as a result, commercial banks begin to be in style again. If something we can be confident both as consumers and producers in the US, business cycles are a certain reality that requires wisdom and discipline to anticipate and prepare enough for but more on this in another article. The focus on this article is to have legitimate and profitable reasons for getting a business loan.
In my experience as both a commercial banker and corporate finance consultant, the purpose of obtaining a business loan has been for both good and bad reasons. First things first, debt capital if not delivered properly becomes a fast and fast way for any business to go badly. The use of a bank loan for business purposes is not bad. Thats why an entrepreneur needs it. In the preparation for a corporate loan, is the first question that deserves a reasonable answer that it is an absolute necessity for the business to get this loan? In other words, if the business does not receive the loan, it will lead to some significant negative consequences for the business?
Lets handle the first observation. What are the good and bad reasons for getting a loan? As mentioned earlier, entrepreneurs see a loan for some reason under the sun. The primary reasons I noticed were that there was no positive cash flow and or or refinancing of existing debt, which in more situations than personal loans were used to finance business expenses notice here as I did not say EXPANSION. Heres a rail rule to get a good reason to get a loan for any business. Ensure that cash flow is positive, stable and healthy in the foreseeable future. The debt capital is intended to supplement and grow cash flow, not to replace it. If the business experiences problems with cash flow, entrepreneurs and or or bosses must dig deep and analyze the business and the market do not make the problem WARNING by getting into debt. Next. Lets look at one or two metrics that can help create the right mentality to get a business loan.
The first metric well reveals is the return on equity. In order not to get into any CNBC financial technical jargon we can keep it simple. ROI returns you if you make some money to keep yourself in business. To calculate, take profit if any after accounting for costs, and divide it into the amount you invested in the business. Expressed as a percentage, the higher the number, the better because it states that the business is a money-maker. Even ROI metrics are a good indicator of whether the business is cash flow positive. Remember, the profit is good, but a healthy, positive cash flow is KING.
The last measurement value points out the debt-to-equity ratio. Again for simplicity, the debt ratio can let you know how hired or indebted the business is. To calculate share the total debt with total equity. The underlying reason why this relationship is so powerful is that it forces the companys owners and or or managers to really understand and understand the debt and capital that make up the capital structure. A fair share of high debt equity companies experiences marginal cash flow levels due to interest and other mandatory debt payments, which in turn are fixed predetermined repayment plan. As a removal, you do not derive unnecessary debt just because it will occur. Have a plan describing how the business will not only pay off the debt but be in a better position financially and operationally after repayment.
In the end, we talked about the importance of having a solid and good reason to get business debt, which is to make it legitimate and that the business already has a positive cash flow. We also raised two powerful metrics to give you more peace in your quest to get a loan. return on equity and debt or equity ratio. Apart from the calculations that these measurements require, they also force one to intuitively know and understand the risk and stability of the capital structure instead of obtaining debt capital.