So your business is growing quickly and you think you are going to need a loan, but you don’t know how much to ask for? This is a common problem, and there is no simple answer that I can give you. Rather I can explain the process that I would recommend that you take when you are coming up with a loan request amount.
1. Create a Sales and Expense Forecast
First you have to develop a set of financial projections (of course, I recommend ProjectionHub). If you have past financial statements then you can develop your forecast based on the past, but if you are a startup you are going to need to create your projections from scratch. Just a couple tips:
- Use as much data as you can find to come up with projections
- Project from the bottom up
- Develop realistic assumptions to build your forecast
2. Analyze Cash Flow Projections
Once you have completed your initial forecast, you can download your projected statement of cash flows and take a close look at your cash balance. If you downloaded your projections from ProjectionHub, then you are looking for the top line cash balance for each month as seen below:
As you can see in month 6 you hit a negative cash balance, and then in month seven you hit a low point of negative $15,000 in cash.
3. How Much Should You Borrow?
So you are projecting a negative cash balance of $15k, you might think it makes sense to request a $15,000 loan. I disagree.
You need to leave some room for error. Your potential lender will only want to make a loan if they can see that you have some wiggle room. Reaching a zero cash balance won’t do it. My suggestion is that you try to keep at least 1 month of expenses in cash at all times. So if you spend $12,000 in expenses each month, then I would suggest you keep at least $12k in cash at all times. So in this example I would suggest a loan request of $27,000.
4. Where to Get a Business Loan?
So now the only question is where to get a loan. At ProjectionHub we recently partnered with Lendio to help match our financial projection tool users with the right lender. Lendio is kind of like eHarmony for business loans. They ask you a few questions about your business and your loan request and then match you with the perfect lenders for you, and it is free!
At the end of the day there is now perfect formula for determining the perfect loan request, but I think building a realistic set of financials, analyzing your cash balance and then leaving yourself at least 1 month of wiggle room will get you really close to what you need.