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5 Tips to Determine How Much Money to Borrow

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5 Tips to Determine How Much Money to Borrow

Posted On May 2, 2015 BY Madhu Jain

An individual should learn the art of managing finances for himself, family, medical exigencies, emergencies or business endeavor. There is always need for more and more; unless properly evaluated and the need for money assessed and comprehended, the moot meaning for ‘savings’ can go for a toss! The financial pundits keep saying understand your palate, assess your dreams and then correlate and fix the issue! It simply means that one needs to consider more than twice the optimum profits that any endeavor shall bring, and should accordingly take calculated risks for reaching the zenith of success.

1. When Does One Think Of Borrowing?

On a personal front, a person needs to have a comprehensive knowhow of what is his capacity or competency to repay a loan furnished. Thereby, he should understand the range of expenses that needs to be covered, before walking to a financial entity or a bank for a loan.

When the sales are low, and there is a lack of finances, a business loan can indeed turn out to be a lifesaver. There is a verisimilitude with personal loans or even car loan or a home loan! Understanding one’s goals, setting them upright with the vision in mind are prerequisites, before opting for submitting or approaching for finances.

When rightly thought, the amount that a person borrows as business loan, can incidentally help the person cover up all costs and return proceeds profitably. In such a scenario, the cost of bearing the loan is not only adjusted, there is also ample scope for personal profitability and business growth. There are five simple questions that any individual or business entity – proprietor or business partner should bear in mind and answer judiciously, in order to understand how much funds should a person borrow!

2. Avenues for Spending the Borrowed Funds

The key question that needs to be answered first by a borrower is across what avenues, or genres or for what purposes would an individual expend the borrowed sum. A generalized answer like propelling the business to better growth making unit and greater heights appears too clichéd! Being specific is important. The borrower needs to have a pragmatic vision; he needs to think of a business venture being ineptly cash-positive, obsessed towards healthy growth, with the margin for the same. The borrower need to satisfy himself with questions like where exactly will the borrowed funds be put?

There may be thoughts like rebuilding the manufacturing or production unit of the venture, or opening a new value-add service, or pondering an expansion of the units to ameliorate sales and proceeds. Again, the funds may be used to purchase larger quantities of raw materials or purchase new machinery or human resources.

Thus, objectively, from the sales angle, the reasons for putting in funds may be enhancing the sales portfolio with better ranges of products. Further, Inventory may be created, sales team may be hired for development or expansion.

The direction of expense of the borrowed funds should be clear, and the business person should know to value the deal. The team should envision the extent of profits that can be made to better the portfolio and achieve tangible, realizable goals.

3. Research Ample Borrowing Options

The idea is to use the money to power short term visions and being about stupendous beneficial results in longer terms. On a personal front, home or personal loans are primarily based on consumption. However, there should be proper avenues to make for the loss rendered to close the loan. It may comprise putting a house or property for lease or rent, or making money from other sources to quench the losses.

There are wide varieties of loans and limitations on the money borrowed. There are terms and conditions on how the money borrowed can be repaid. It is important to match the desired loan amount, analyze the financial plan and correlate the same with repayment terms. There may be myriad types of loan options that would let a person borrow more funds than other for himself, or business endeavor against a mortgage or mere unsecured. It is important to validate and analyze the terms and just not jump into one such option, starry-eyed. Remember that if a person needs $200, it is far better to seek for a loan of $150 or $180. The borrower should try getting the remaining from own resources, friends or families, rather than taking out $500 as loan and then inviting a nightmare

4. Do You Know Your Repayment Limits?

The fundamental rule that suffices for life on this planet is ‘quid pro quo’! Everything has a cost, and with loans, the costs incurred seem to haunt a borrower in his sleep! A person should understand how much funds are required to set the work in progress, and thereby get profits, or reuse the money to fund the business endeavor. It is important to know the extent of funds a borrower is eligible or qualified to get.

If a person can get $200K loan easily, yet if the requirement is of $90K, it shall be a pragmatically correct decision to take only $90K and not more! A loan doesn’t necessarily generate income; it’s a liability. More the amount taken, greater is the EMI rendered

5. Validate The Lending Source

People need to be fully aware of the trustworthiness of the lender, the detailed terms and conditions, any hidden costs involved, mode of repayment, tenure and condition for the same. The nature of collaterals, cash flows or business credits or overdrafts may vary for person-to-person, and depending on the nature of endeavors. There are various sources that give out loans easily, without any hassle; however, later on, if the terms of policies are unclear, it may create a nightmare for the borrower.

6. Always Take A Step Back, Think And Decide

There is no point doing some hara-kiri and ending up with getting an overvalued loan from the wrong source, and then paying out more than necessary. Understanding the personal needs, requirements or the requisites of the business, doing proper evaluations and matching the goals and standards are required before opting for a loan. If the premise for borrowing funds is unclear, there may be more wrongs done than right, and eventually, there is no turning back from the unnecessary pressures!