Running a startup can be quite a costly affair.
You have to budget for licensing, hire workers, buy necessary technologies and materials, etc. It can be very hard to keep track of (and afford) all of the expenses, and unless you have a nice chunk of change saved up you may need some outside help.
Many startup owners are too afraid of taking out a business loan, as they feel there are too many unknowns when taking out the loan.
How much will it cost?
How much will my interest be?
What about collateral?
Will I even be able to pay it back?
It is understandable to be nervous, but you shouldn’t let these doubts get in the way of advancing your business. Thankfully, there is a tool that business owners can use to answer all of these questions and more: the business loan calculator by Camino Financial.
Real Life Example of Business Loan Calculator Use
Let’s take a look at Koji Kanematsu, a Japanese immigrant who was looking to start his own sushi shack.
Kanematsu found himself missing his favorite street snack, Onigiri, that’s how he decided to start his own business serving this delicious rice ball snack. But when Kanematsu needed some extra cash to move his business forward, traditional banks turned him away.
He simply did not have enough income for the banks to trust that he would repay the loan.
Kanematsu eventually turned to a private lender. Before granting him the loan, they helped him calculate how much money he would need.
Using a business calculator and the amount needed, they showed Kanematsu how much his monthly payments would be, how much interest he would pay and how much the loan would actually end up costing.
By taking the time to calculate how much money he would owe, Kanematsu was more confident that he could pay back the loan. He was eventually approved for a $50,000 loan. This was enough to really propel his business to the next level.
With his new financial backing, he was able to increase his revenue by over 400% and begun working on opening a second and third location.
This story shows how a little guidance can go a long way in ensuring success with a business loan. While it can be helpful to consult with lenders, you can also find out all of this information using a business loan calculator.
What To Watch Out For
When you use a business calculator, there are a couple of things to watch out for during your calculations:
Debt Service Coverage Ratio — It is important to know your debt service coverage ratio before taking out a loan.
There are multiple ways to calculate this, but the most basic one is to take all of your monthly costs (rent, inventory, other loan payments etc.) and divide that by your gross income. Multiply that by 100 and you have your debt service coverage ratio.
This should fall under 30%, otherwise taking out another loan may strain your finances too much.
Monthly Payments Don’t Exceed Monthly Profit — Your loan’s monthly payments should never exceed your business’ monthly payments. As a rule of thumb, your loan’s monthly payments should never exceed 80% of your monthly income.
The Loan Cost Doesn’t Exceed The Growth From the Loan — It may sound too good to be true, but with proper planning, you can make sure that the money you gain from the loan exceeds what it will cost you to pay back the loan.
If you are not sure that the loan will make you more than it costs, then you need to go back to the drawing board to have a plan for how to turn that loan into more growth and profits.
It’s your turn to use a business loan calculator
We hope this helps you realize the importance of business loan calculators and try them yourself. There’s nothing you can lose, you can only win knowledge and growth for your business.