Business Loan:
How Much Should You Ask For?

It's not just about loan payments and what your business can afford.

Most businesses understand that they need outside capital from time to time to grow.

So, they run down to their local bank or lender and ask for the money.

However, far too often, these same businesses find themselves unable to make future loan payments or find that their business has not grown like it should.

Why? Because they asked for too much.

Not only is it harder to get an approval for a larger loan, leaving many businesses without access to capital, but having too much of a good thing can bring about a business's decline.

Money in your business (whether you have earned it or received it from a business loan) is an asset. And, just like any other asset it has to earn a significant return.

This return not only has to cover the repayment of the loan - its principal and interest - but it also has to generate enough to cover any added overhead from using that loan as well as provide a tidy profit for the business - isn't that what you are in business for?

If it does not, it is being financially wasted.

What typically happens is that when a business is seeking a bank loan or outside financing, they don't look deep enough at the returns.

Let's look at an example:

Your business has two opportunities. One to earn an additional $55,000 in revenue per year for the next three years and one to earn $85,000 in revenue per year for the next three years.

However, to earn the $55,000, you would have to borrow $100,000. But, in order to earn the larger amount, you would have to borrow $200,000.

What do you do?

Clearly you take the smaller amount.

What? Not what you thought!

The smaller amount provides the larger overall return for the business - allowing the business to both cover the loan payments and earn a significant return to cover everything else.

For a $100,000 loan for three years at 8%, the total annual loan payments would equal about $37,600.

That gives the business a margin of $17,400 ($55,000 in extra revenue minus the $37,600 for P&I on the loan). Based on the $55,000 in additional earned revenue, the company generates a 31% return.

So, not only did the business earn enough through the business with the loan proceeds to cover the cost of the loan (pay for itself) it generated a significant amount of return to cover all other costs.

The $200,000 loan at the same rate and terms has total annual loan payments of $75,200 providing the business a margin of some $9,800 ($85,000 minus $75,200). Based on the $85,000 in additional earned revenue, the company would only generate a smaller 11.5% - not even half from the smaller loan.

Then, to really grow this business overtime (keeping payments small and manageable), the company could begin to search for several smaller projects that provide a similar (around 30%) return.

Think about it: Two smaller $100,000 projects returning 30% + will provide so much more to the business than one $200,000 project returning only 11.5%.

The bottom line is that you should only ask your lender for an amount that you can deploy (use) in the business to generate the largest net return for your business. Even if that means requesting a smaller business loan than you know you can get.

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