“But what if I default?” said any business owner before dismissing the idea of a small business loan. People default on personal loans all the time so it’s only natural to think you’re just as likely to be unable to pay off the debt accrued by your business. According to the Small Business Administration, however, the default rate on small business loans in 2016 was just 2%.
That’s because if you are already running a successful business, there’s no reason you should experience difficulty paying off debt. Ensuring you never default on a small business loan is as easy as following three simple steps, all of which require the same skills that made you a successful business owner in the first place.
1. Make Sure A Small Business Loan Is Really What You Need Right Now
Any smart business owner can spot a lucrative or necessary investment. Is your new location or marketing campaign really going to give you the boost in revenue you’ve been looking for? Do you really need that new piece of equipment in order to keep day-to-day operations running smoothly? Maybe you need to find out if your business is truly as successful as you think by examining the same financial records that are required for a small business loan application. With one equation we’ll go over soon, you can find out how much money your business can pay back each month for a certain period of time without jeopardizing your survival.
The main purpose of this exercise is to determine whether or not your business possesses the foundation to generate enough revenue to grow and pay off debt simultaneously. Young businesses tend to forget that additional funding is not meant for keeping the lights on when the business hasn’t even had a chance to see if it can do this on its own. In these cases, it’s usually not a lack of capital but a lack of ideas or cohesive teamwork that is halting success. Small business loans are meant for stabilizing or increasing revenue, not getting by and advancing into an unforeseeable future.
2. Make Sure You Ask For The Right Amount
Asking for too little or too much could bring your business dangerously close to bankruptcy. You can figure out how much capital to borrow by first determining how much cash your business has on-hand for paying off debt. The answer to this question lies within a mathematical formula called a debt service coverage ratio, or “DSCR.”
Cash flow / Loan Payment = DSCR
The first part of the ratio can be your monthly or annual cash flow while the second represents how much debt you’d hypothetically have to pay back on a monthly or annual basis, depending on what you used for the first part. If your answer is above 1, you would easily be able to pay off this hypothetical loan while covering regular business expenses.
3. Choose Alternative Business Financing
This should really be step one because at my company, United Capital Source, all you need to do is fill out a one-page application before allowing one of our business funding experts to help you with the previous two steps. Small business loans from alternative business financing companies are also dramatically easier to pay off than loans from traditional sources, like banks. Terms are extremely flexible, and can be customized based on the unique circumstances of your industry.
Many clients of UCS, for example, need to take out working capital loans or credit card processing loans during the slow season in order to maximize performance for the busy season. Since sales are down when they receive funding, these make smaller payments up until business begins to pick up just a few months later.
UCS prides itself on establishing long-term relationships with clients that do not end at the loan’s due date. So when discussing how much capital should be borrowed, we consider whether or not the borrower’s business would be able to sustain itself for at least several months after the debt is paid back. We are also able to provide funding exactly when you need it so you can execute your investment immediately and ensure that it achieves the desired results.
Think You’re Ready To Take The Next Step
At UCS, we are so confident in our clients’ ability to pay off debt that we do not ask for a personal guarantee or collateral and even offer unsecured business loans for certain borrowers. There is no risk of losing your car or home when you are given loan terms that actually make sense and have the guidance of a funding expert at your disposal. If a concern arises after funding is distributed, a simple phone call or email is all it takes to have someone tending to your question right away. Our biggest goal is not to make money but to see your business grow, which is why we take the time to learn about your business’s needs. Rest assured, the business funding program you receive will be tailored to have little if any impact on cash flow and allow you to devote 100% of your attention to your investment, not paying your bills at the end of the month.