Understanding debt obligations is the most important thing when applying for a loan.
There are many things a borrower needs to consider when thinking about a loan, but one outweighs all others by a landslide: what the monthly payment on the loan will be and whether that borrower can or cannot afford the payments.
I don’t want to minimize the other things that borrowers need to consider–liens, prepayment penalties, etc.–but this one fundamental tops the list. Borrowers must understand what their monthly debt obligation will be and validate this versus current income and potential income from the proceeds of the loan under consideration.
When weighing the idea of any loan, the borrower should be confident that he or she can comfortably afford it. If the monthly payments take too much of a bite out of your cash flow, you’re probably going to find yourself having to add more and more debt to keep afloat.
Taking out a loan that you are not confident you can pay back is too often the final nail in the coffin for suffering businesses–or the force that pushes a business over the edge into a perpetual debt cycle.
Sit down and carefully consider your current financials and projected financials over the next fiscal year. If a loan doesn’t comfortably fit into the equation, it may not be the best time to seek financing or may be an indicator that there are bigger problems in the business that need to be dealt with before a loan is considered.