How Big of a Business Loan Do I Need?

You narrowed down your ideas and wrote up a business plan – now, you need the capital! When it comes to business loans, you may not be sure how much you really need. The guide below walks through the most important factors to consider before you submit an application.

3 Factors when determining how big of a business loan to get

1. Your needs

Detailed cost projections will give you a better idea of how much money you truly need. This can be broken up into a few different cost analyses. First, put together a sales forecast using your industry experience and market trends. This will show monthly sales projections along with units and pricing. Then, highlight the expenses required to sell these units and any overhead costs in an expense report. Lastly, predict your cash flow based on the findings in your sales forecast and expense reports. All of these items can help guide you when you start working with a lender. Plus, lenders appreciate seeing you’ve done your homework.

2. Your budget

You need access to funds, but you don’t want to overextend yourself, either. Make sure, whatever the terms of an offer, that you can afford to pay it. How much you end up spending over the life of a loan, between monthly payments and interest, will depend on a few factors:

• Debt Service Coverage Ratio (DSCR). DSCR looks at your cash flow and what you have leftover to make loan payments. This ratio tells lenders the level of risk they incur when lending you money. The higher the risk, the higher the rate and the more interest you’ll end up paying over the life of a loan.
• Debt to Income Ratio (DTI). Sometimes, a lender may review your personal debts. They’ll compare your personal monthly debts to your gross monthly income to determine your DTI. Just like your DSCR, this is a risk assessment.
• Credit score. Though you’re borrowing money for a business venture, a lender may pull a hard inquiry on your personal credit score. They’ll review your payment history, credit utilization rate, and the length of your credit history.

Tip: Want to improve your credit score before applying for a business loan? Learn how to give it the boost it needs with General Electric Credit Union’s (GECU) free, downloadable eBook The Ultimate Beginner’s Guide to Credit Scores.

• Business loan interest rate. All of the above will impact the loan rate you’re offered, which is what a lender charges you for access to the loan. The longer the loan term, the more interest you’ll end up paying.
• Loan term. While a shorter loan term means less interest paid over the life of a loan, a longer term will help you keep monthly payments lower. Be sure to strike the right balance between a manageable monthly payment and loan term.

3. Future plans

It’s wise to be intentional and strategic when securing funding for a business. A loan that’s too large for your needs now may lead to snowballing debt and cause you to miss out on future opportunities, such as an expansion, as a result. Make sure the loan you’re taking out makes sense for your needs now, so your future isn’t thrown off track.

How GECU can help

Here at GECU, we’re passionate about the communities we serve because we’re a part of them, too. We love cheering for local sports teams, visiting destinations like the Cincinnati Zoo, and strolling along the Ohio River. Our ties with Cincinnati run deep, and you’ll enjoy a more personable loan experience as a result.

We understand the people you’re trying to reach and communities you serve – let us help you secure financing to make your business goals and dreams a reality. Reach out to our dedicated business services team today for more information on business loans, business checking and savings accounts, and much more. We’ll walk you through everything, including what collateral may be needed on a business loan. Learn more about credit union membership online. You’re eligible for GECU membership if you live, work, worship, or go to school in select Ohio, Kentucky, and Indiana counties.