“Ask the Business Counselor” Article
Bank Loan
by Bend Business Development Center at Central Oregon Community College
I am interested in expanding my business. For my business to really be profitable I need to take it to the next level in order to get bigger orders. How do I know how much money to ask for and for how long can I get it? Madras Manufacturer Dear Madras, Knowledge of the financial facts of business life can save you embarrassment and help you borrow money at a time when your business needs it badly. Whether you have little or no experience or are a seasoned borrower it is important to have a sound understanding of business borrowing. The amount of money you need to borrow depends on the purpose for which you need funds. Figuring the amount of money required for business construction or expansion is relatively easy. Equipment manufacturers, architects, and builders can readily supply you with cost estimates. On the other hand, the amount of working capital you need depends on the type of business you are in. The best approach to determining your needs is to develop a detailed projection of your costs and your sources and uses of funds over the next 12 month period. Such a projection is developed through the combination of a predicted budget and a cash forecast. The budget is based on recent operating experience plus your best judgment of needs over the coming period. The cash forecast is your estimate of cash receipts and disbursements during the budget period. Together they represent your plan for meeting your working capital requirements. To plan your working capital requirements, it is important to know the "cash flow" of your business. This should be projected monthly over the next year. These projections will tell you and your banker how much money you need for your growth as well as your ability to pay it back. When determining the amount of money to borrow for your firm, it is important to know the kind of money you need. Basically, there are three kinds of money: short term, term money and equity capital. Keep in mind that the purpose for which the funds will be used is an important factor in determining the kind of money you need. It sometimes can be complicated by the fact that you may be using various kinds of money at the same time. An important distinction between the kinds of money is the source of repayment. Generally, short-term loans are repaid from the liquidation of current assets which they financed. Long-term loans are usually repaid from earnings. Short-term bank loans can be used for financing things such as accounts receivables for maybe 30-60 days. Or maybe for items with a longer pay off time such as seasonal inventory over a five to six month period. Usually, lenders expect short term loans to be repaid immediately after their purpose has been served. Banks loan money in two ways. The unsecured loan is frequently used for short-term purposes. You do not have to put up collateral because the bank relies on your credit reputation. The secured loan involves a pledge of some of your assets. The bank uses this as security against the loan, sometimes even when chances of success are good. Term borrowing provides money over a longer period of time. This can be in two forms; intermediate- less than five years, and of long-term - loans of more than five years. However, for your purpose of matching the kind of money to the needs of your company, think of it in terms of money you will pay back in installments from earnings. Some people confuse the term borrowing and equity (or investment) capital. Yet there is a big difference. You don’t have to repay equity money. It is money you get by selling a part interest in your business. The important thing to remember is to work with your banker. Have a clear idea of your needs and goals so that you and your banker can work together to develop a program that works for everyone. |
