When you receive a cash windfall, particularly after having tight finances, the impetus may be to spend all of the additional available cash that you suddenly have access to immediately. To restrict against that budgeting is often a required component of the terms of your loan.
When you borrow money from factoring companies, most lenders will want to know why you need the funds that you are looking to borrow and what methods you are using to deploy these funds. This is only a portion of the loan budgeting that you are going to need to prepare and this article will focus on methods for budgeting and for setting aside money to repay your small business loan.
Loans require budgeting both in regards to using the proceeds of the loan as well as in how you set aside funds to repay the loan that you are borrowing. It is essential for a borrower to create a budget that lays this out to a lender so that they can understand the measured way that you will use money. Often a great deal of negotiation surrounds this very concept and discusses what the money will be spent on. Lenders prefer to see the borrowed money invested in real property that they can potentially reclaims upon a potential default in the loan terms. Other alternatives that are commonly acceptable are financing equipment purchases and acquiring competitors. Be honest and open with your budgeted plans to spend the funds so that no conflicts arise between your company and the lender.
Finally, you will have to budget for funds to repay the loan and to meet the financial loan covenants that are put in place. You will likely need to submit budgets to the lenders on an annual or even quarterly basis. Start this process before you borrow money and determine what percentage of your cash flow from operations will be spent on repaying your loan and the interest on the loan. This will impact the amount of money that your company will be able to borrow.
Make sure that there is a cushion in your calculations so that you are unable to miss the requirements of your company’s loan covenants or repayments. Finally, review and adjust your budgets as time goes on and you get a clearer idea of what your revenues and expenses are likely to be and be sure to segregate your costs into fixed and variable costs that you can potentially adjust in case of financial difficulty.
Budgeting takes diligence, persistence, and honesty to do well but is a necessary part of borrowing money from a lender. Be sure to develop and update a budget regularly when you are taking out a loan of any kind to identify the uses of the loan funds you are borrowing as well as the sources for future repayment.