When performing loan simulations, the entrepreneur may be faced with the following question: What is the exact amount your business needs at that time? Today, the challenge is not to get the loan itself, but to get it to an optimal value – that is, that meets the current need of the business and allows for installments that fit the revenues.
Here’s how to set the optimal loan amount for your business, understand which financial metrics to look at before applying for credit, and what to look for when calculating the cost of the loan.
How do I know if my business can afford a loan?
First and foremost, you need to assess the financial viability of your business to find out if you can afford the monthly installments of the loan. This step is useful even when negotiating lower costs – if your business has good numbers, the loan provider understands that the risk of default is lower.
It is simply the sum of the company’s revenues over a given period, whether quarter, semester or year. This metric is useful to let you know how your sales are doing according to your previous prospect. Below-expected sales may come from low sales or a price mismatch. Turnover within the established target shows that there is a predictability of revenues.
Profitability, as its name suggests, indicates a company’s ability to generate profit. Measured as a percentage, this rate can be obtained by dividing net income (excluding fixed and variable costs) and gross monthly revenues. For example, if your turnover last month was $ 20 and your net income was $ 2,000, your profitability is 10%.
This percentage is what is left over every month for your company to make investments or save. That is why profitability is an important indicator when getting a loan for your company. It shows that there is a margin for investment, which suggests less risk.
The cost structure of a business reveals the sustainability of a business. Fixed costs refer to those that are predictable and do not vary if the entrepreneur increases production. An example is the rental of the commercial point: although it can be adjusted, its value does not vary most of the time.
If fixed costs are high, the company has less financial margin to bear interest and credit rates. Otherwise, the business demonstrates scalability and presents less risk to the credit institution.
Dividing the annual operating profit by the net revenue of the same period and placing the percentage as a percentage yields the operating margin of a business. This indicator measures a company’s efficiency — that is, the share of operating activities in net revenue. For every R $ 1 from sales in the business, a certain portion refers to operating margin.
Degree of current indebtedness
Finally, the degree of indebtedness shows whether your venture has the margin to borrow more credit. Understand that indebtedness, when it comes to a company, is not necessarily bad: it is necessary to observe the destination of the resources obtained from the generation of debt. If money is used to remedy current expenses, there is a problem; These accounts should be covered with the business’s own revenues.
When expenses exceed revenues, the only way to cover the difference is by hiring more credit, which will generate more expenses. On the other hand, if debt is used to generate more profit or to finance a strategic move, the investment income is expected to cover the debt.