Do you need to take a business debt? If yes, never rush into the decision to do so. There are some factors you need to take into consideration before you finally take the debt. They have to be considered with awareness and research to benefit your business more than suffer in the long run.
Kawan Choksi- What should you assess before applying for a debt?
Kavan Choksi is aneminent businessman with expertise in entrepreneurship, business management, and financial management. According to him, debts mean knowing the game of numbers. However, it is still an investment, so do not consider it to be a liability. Obviously, there is an element of risk, but it can be managed.
Before taking a business debt, the following are some factors you should consider-
- Time for increasing the revenue of your business– You need to boost the revenue of your business; however, keep an eye for the gaps between its entry and when your loan payments begin. In case you need to start the repayments for the loan much before the revenue comes in, this will result in a cash crunch. It will cause a loan default, so make sure that you have a plan in place to start loan repayments immediately.
- Forecasts and their certainty-When you begin to anticipate the revenue for the business in the future, you cannot say it is a certainty. Even if you have a contract in place, the revenue you get will still be an estimate until the cash is deposited inside your bank account. However, there are some factors for you to consider below-
- Do you have work contracts set out in place, or are these forecasts based on new sales for the future?
- The stability of your present and potential customers will determine the outcome of your forecasts- whether they will work or not?
- Do market cycles heavily impact your business?
- How much internal and external data do you have to back your projections based on your business judgment?
- Risk tolerance- When you are evaluating your forecasts, you have to take your risk tolerance into account. Are you being conservative and willing to take a minimum risk, or will you be more aggressive and place your business on a bet?
The conservative approach entails using the worst-case scenario sales numbers and not taking more than you can repay with your current cash flow. However, a very aggressive policy would entail you banking on potential sales and borrowing a debt amount that needs you to reach those potential sales targets for repaying your loan in time.
In the opinion of Kavan Choksi, before taking extra debt that would impact your credit score, ensure that you keep your personal and business finances separate. This will have an adverse impact on the fate of your business later, especially if you would need more financing for your business. Note that debt is in no way a dirty word; however, make sure you are aware of the numbers and your judgment to make the right choice for your small business!