Cash Flow Based Business Loans
Much like our discussion
regarding unsecured business loans, this article will focus on business loans
that are primarily secured by the cash flow of your business or your personal
income. When looking for business loan, it is imperative to understand how much
of a business loan you can afford to undertake. This includes not only your
current income, but also a projection of your anticipated income that will
accrue through the use of debt proceeds. The most important aspect is to look at
your current income. This is also the most important business metric that a bank
or finance company will look at when determining whether or not you are a worthy
credit risk. Actual income is far more important than expected income. With that
said, you need to ask yourself some very important questions when determining
the amount of debt you are seeking. These questions include, but are not limited
to:
- What is my
current income?
- Will my
current income fluctuate?
- How much do I
anticipate that I will earn once I use the proceeds of the business loan?
- If this
business does not work out, can I afford to continue to pay off the loan given
my current income?
When a bank looks at an
existing business that is looking for business loan – they primarily focus on
your businesses previous ability to generate positive cash flow. This is because
banks want to know to be well aware of your current ability to repay any
business loan that they grant to you. It should be noted, that in most
circumstances, your business loan’s interest is deductible as a business
expense. However, the principal of the loan is not. This must be paid out of
your after-tax cash flow. This is why, especially for small businesses, the cash
flow statement is extremely important. Again, if you are having issues making
these determinations then it is imperative that you speak to your certified
public accountant. Your CPA can assist you greatly in making a determination of
your business loan needs, your ability to repay the loan, and your ability to
secure a loan based on your current personal and business income.