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More time at home means many Australians now have the opportunity to re-assess their lifestyle and spending habits and set some serious saving goals. So how can you actually go about it?

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In this episode of The nestegg Podcast, host Grace Ormsby is joined by Melbourne-based Reventon’s Billie Christofi to talk all things finance and the impact of isolation on our hip pockets.

In stage 4 lockdown, Billie shares the importance of going back to basics when it comes to budgeting, methods to re-assess spending habits, and some of the less conventional ways people can boost their wealth at this time.

Thanks Billie, for sharing your insights with the nestegg podcast team!

Have an investment story to share? Get in touch at [email protected] and you might get featured on an upcoming episode!

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From financing a credit card debt to deciding on a home loan, Nest Egg’s got your back! " ["secure"]=> int(0) ["page_description"]=> string(7) "nestegg" ["page_rights"]=> NULL ["robots"]=> NULL ["page_heading"]=> string(66) "Borrow Money - Your Guide to Loans and Credit Management | nestegg" ["access-view"]=> bool(true) } ["initialized":protected]=> bool(true) ["separator"]=> string(1) "." } ["displayDate"]=> string(19) "2020-09-02 02:50:12" ["slug"]=> string(43) "15670:capitalising-on-the-covid-19-pandemic" ["catslug"]=> string(11) "302:podcast" ["link"]=> string(56) "/resources/podcast/capitalising-on-the-covid-19-pandemic" ["image"]=> string(43) "images/podcasts/Billie_Christofi_WEB_ne.jpg" ["image_alt"]=> string(0) "" } }

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Borrow

Can your small business afford that business loan?

By Louise Chan

November 11 2019
Share

Borrow

Can your small business afford that business loan?

By Louise Chan
November 11 2019

Taking out a loan may help provide financing that your business requires, but it can be bad for your business if you get rejected or are unable to make proper repayments.

Can your small business afford that business loan?

By Louise Chan

November 11 2019
Share

Taking out a loan may help provide financing that your business requires, but it can be bad for your business if you get rejected or are unable to make proper repayments.

To avoid jeopardising your company’s financial future, make sure that you can actually afford a loan before applying for one.

Here’s how you can determine whether your business is financially secure enough for a loan.

Debt-to-income ratio

Lenders look at the borrower’s debt-to-income ratio – the ratio that measures the amount of debt against pre-tax income – to determine if they have the financial capacity to pay their debts. In this sense, most lenders require that borrowers have a debt-to-income ratio lower than 50 per cent.

For a new business, it’s also advisable to keep your personal debt-to-income ratio low and establish a good track record of paying your debts on time.

Debt service coverage ratio

Lenders also look at the borrower’s debt service coverage ratio (DSCR), especially if they are currently paying off another loan.

The DSCR calculates the ratio of cash that is available for debt repayments.

A common formula used to determine DSCR makes use of the company’s earnings before interest, taxes and amortisation (EBITA) and is calculated as follows:

DSCR = EBITA ÷ (interest + current maturities of long-term debt)

Lenders typically prefer borrowers with a DSCR greater than 1.0 because this shows that they have extra cash to use for repayments.

A DSCR below 1.0 means your business has a negative cash flow and you may have difficulty with repayments.

Calculate the amount of loan you need

As a small-business owner, financial institutions will consider your business as high-risk. Lenders may reject your loan if they think you’re borrowing an amount that your business will have trouble paying off.

Borrowing too much or too little money can affect your future cash flow. Too much loan means larger payments, while too little may result in insufficient funding for the loan.

The best thing to do is to find out how much your business really needs to borrow.

How to calculate the amount of business loan you need
To determine how much your business needs to borrow, you need to compute for it by preparing detailed financial statements and cost projections.

The cost projections should look into the actual cost of everything that the borrowed money will be spent on. Include your business’s cash flow (i.e. income and expenses) and other financial projections.

The financial statements, on the other hand, should include your actual or projected profit and loss and cash flow statements.

Financial statements are important because these documents will give you an idea of how much you can potentially use for repayments. It may also help lower your loan amount should you decide to partially fund your business needs using your profit.

Explore nestegg for more information about borrowing.

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About the author

Louise Chan

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise Chan

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