Read Aloud the Text Content

This audio was created by Woord's Text to Speech service by content creators from all around the world.

Text Content or SSML code:

When does it make sense for a business to get more than one loan? Most business owners would only want to take out one business loan. But sometimes, it's better to pay off several business loans simultaneously than to do both. Before we get into the specifics, let's talk about the conditions you must meet to even think about taking out multiple loans: 1. Figure out your ratio of debt to income As you might expect, people who are already behind on their bills shouldn't take out more loans. Well, how much unpaid debt is too much? You can find out by figuring out your debt-to-income ratio. For example, a current person on all their bills should have less than 40% of their income going toward debt. People behind their accounts receivables should also avoid getting more than one loan. For example, has one of your clients paid you after more than 30 days? If so, you should wait for this payment before getting another business loan. 2. Check the credit of your business Your business credit with lenders, vendors, and suppliers is mainly based on how well you've paid your bills in the past. So, missing payments will hurt your business credit and ability to get business loans. So, before applying for more business loans, ensure a good payment history with all your creditors. 3. Make sure you have enough income coming in regularly. Lastly, check your financial statements to make enough money regularly to make another monthly payment. "Recurring" is the important word in that sentence. If your cash flow is only sometimes steady, a fixed monthly payment could help your finances more than help. Reasons to take out more than one loan. Here are some examples of when it makes sense to take out more than one business loan: • Business growth, property, and building improvements. This is less risky because you are investing money into the business. • Taking advantage of new business chances. Some things are too good to pass up, and you never know when you'll have this chance again. Being in the right place at the right time helped many entrepreneurs get where they are now. • Hiring people with the right skills. Your team is the most important thing you have. And it's hard to find good help. So, investing in salaries, benefits, and training is always a good idea. Why it's a bad idea to get more than one loan On the other hand, here are some situations where getting multiple business loans is not a good idea: • To pay for operating costs. If you can't pay your bills and employees and you already have a loan to pay back, don't get another one. Instead, it would help if you talked to a good lawyer and accountant about filing for bankruptcy. • You don't have enough money coming in – If your income has gone down or your losses have gone up, it's risky to take out another loan for your business. So, take care of your money first. What is "stacking" a business loan? There's getting more than one loan, and then there's stacking business loans. This is mostly about getting a lot of business loans for none of the above reasons. See, those reasons should bring in more money for you, so you don't have to keep borrowing it. Also, you would be so busy with the project that you would only consider getting another loan later. Stacking usually means getting more than one business loan within a few weeks or months of each other. Most of the time, the loans are manageable (less than $50,000). Before you know it, you have four or five loans to pay off, and your business is in the same place it was when you started. You can avoid this common problem if you are patient and learn from your first business loan. Take some time to examine how your income and cash flow have changed after getting your first loan. If you didn't reach your goals, it might not be because you need more money but because you need to change your strategy. No matter what, you should only get a second loan if you know how much more debt you can take on while paying off the first. How much money should a business have saved up? One of the main reasons why businesses fail is that they don't have a "rainy day" fund. This is why older business leaders always tell younger business owners to save as much money as possible. It's easier to do this, though, if you know how big this emergency fund should be. Unfortunately, goals that need to be clarified are always more challenging. Here's how to figure out how much money you need to save in case of an emergency: 1. Business Expenses + Personal Expenses The first step is straightforward: figure out how much money you usually spend on your business over a few months. This includes all of the business's monthly costs and any other costs. Most likely, you spend money on something other than recurring bills and payroll every month. Extra business costs will always come up, so you must include them in your calculations. Even if you can cut some costs, spending more than less is usually best. Also, only look at monthly data from times that were either very busy or very slow. Instead, figure out how much your business spends on average in three to four months. You may have been spending more and more money over time because of things like rising demand. Now comes the hard part. Most likely, your business is the only way you make money. If this is the case, you must also figure out how much it will cost you to live for a few months. In a business crisis, your budget would be changed. Which of your costs could you cut back on? What personal bills would you still have to pay if your business almost didn't make any money that month? Since your business affects your expenses, your emergency fund should be able to pay for your business and your most critical personal costs. 2. How shaky is your market? Some things may mean you need to save more money than the two calculations above suggest. One example is the kind of goods or services you sell. Does your business serve a particular group of people or fill a small need? Is your business based on the seasons and, as a result, prone to long slow times? The more different things you do in your business, the less money you need to save. When the economy or an industry as a whole goes down, these kinds of businesses are more likely to be able to keep making a steady income. If you had to do anything, it would be to make small changes to your products or services. On the other hand, businesses that are very seasonal or very specialized might need to set aside more money because their target market is more fragile. 3. Replacing Major Income Sources Let's say you just lost a significant source of income for your business. This could be a big customer for a wholesaler, a supplier for a store, or a company that sells to restaurants. How long would you replace that resource and make up for your lost money? Remember that you shouldn't be hopeful about these calculations. Most successful businesses would need at least three months to find a new source of income if they lost one. If you think it will take more time than less, you might need to add to your estimated emergency fund.