Having the ability to service your loan (being able to make your repayments on time, in full) is one of the major factors that lenders will take into account when considering your loan application.
It’s also a good idea for you to take this into consideration when first weighing up whether you are ready to apply for business finance.
By understanding your business goals and basic financial position, you should have a good idea as to whether you can repay your loan.
Factors you should consider:
- Profit – Does your business generate enough profit (revenue minus expenses) to pay the principle plus interest?
- Cashflow – Will you have enough cash available on each repayment date to ensure that you can make payments on time?
- Existing debt – Do you have any existing debts that require servicing, and will this debt become too difficult to manage together with a new loan?
- Rationale for borrowing – Again, this goes back to the purpose of the loan. Will the new borrowing increase your cashflow or profit? Will it allow you to further your goals and grow your business? Or is it purely being used to keep your head above water?
- Keep the end in mind – Many types of business loans don’t pay of the debt in full with regular payments, ie at the end of the loan term, you will may a significant amount of principle to pay back to the financier. You need to have a clear action plan in place to clear this debt or re-finance it.
Loan calculators are a good way to get some indicative repayment figures, as well as total interest payable, based on loan amount, repayment timeframe and interest rate.