Most business owners understand the importance of creating and sticking to a business budget; especially when they are using borrowed money—like bad credit loans. It is the best way to make sure that the business expenses do not exceed the working capital and the income during the month, forcing you to resort to debts to meet operational needs.
Budgeting the proceeds of bad credit loans reduces the uncertainty that often accompanies business operations, especially in terms of balancing income and expenses. It also provides a stable fiscal framework when making financial decisions.
Here are the two important benefits of creating a budget for your bad credit business loan proceeds:
Predict cash shortfalls
One of the reasons why you need to create a budget is to have an idea of the possible income and expenses. While you can estimate the income through the sales volume, it is still dependent on the expenses and how you manage it to meet the orders. When you understand the possible cash shortfalls, you can make plans on how to address them, using your financial resources.
For example, you can plan in advance on how to use the financing you obtained, or to recognize when top secure additional financing. You can also check if there are lines of credits that you can tap into.
Another good strategy is to project your income every month. This way, you can shorten the collection period of payables. Instead of 30-day payment, you can shorten it to 15-days so that you will have enough cash to cover the foreseen expenses for that period. It is very important to realize that there is a huge difference between sales and income. While you may have increased your sales for January, your income may still be the same if you are not able to collect payments from your customers.
Plan large expenditures
Business expenses are categorized into two—fixed and variable. You can plan on how to meet overhead costs such as office space rental, administrative expenses and payroll, which are consistent and fixed expenses. But, you may not be able to do so, when it comes to variable expenses that usually depend on sales volume.
The higher is the sales– the more expensive the inventory. So, instead of being surprised with large expenses, why not create a budget for your bad credit loan so you can meet large variable expenses when the need arises? You can also make a budget that includes the purchase of one-time capital expenditures such as equipment and buildings.
Reduce costs by budgeting the proceeds of bad credit loans
Calculate the debt-to-income ratio of your business by dividing the total monthly payment for your business debts into after-tax business income. Let’s say, you are self-employed. You are paying $350 each month for your business line of credit. On average, your business earns a monthly net income of $2,500. That means, your debt-to-income ratio is .14, still lower within the 15% debt to income ratio limit.
By planning your financing in advance, you can choose a loan product that best matches the debt repayment style of your business. Let’s say, you usually receive payments for accounts receivables on the 29th of each month. That means, you also have to get a loan that falls due on the same day or the day after. If you generally make payments on the 15th, there is a big chance for you to miss payments. This means you will have to pay additional interests or penalties.
When you have an idea of how much you can spend on a certain period, it will be easier for you to design your own payment schedule. For example, repay your bad credit loans within 2 years, on a monthly schedule. By knowing how much you can afford to pay each month, and by getting the dates when you are most likely to have enough money to repay the loan, you will be able to repay more than the minimum required each month.
A sound financing plan makes it easier to avoid debt traps or those that greatly increase the cost of borrowing. There is no need to worry about late fees. You don’t have to pay late, nor the over-the-limit fees because you will not exceed the credit limit. You can also avoid making cash advances that quickly charges interest. On top of it all, if you know how to maximize your loan proceeds, you can look for ways to negotiate better repayment terms. This will allow you to possibly get a discount from lenders. Who knows? You may be able to request a reduction in interest rates and annual fees.
When managing your business finances, it is important to remember the budgeting principles that define your company’s basic financial structure. How your bad credit loans will be managed determines whether your business will be able to overcome the uncertainties that often accompany expense and income forecasting, which are essential in making effective and successful financial decisions.
To receive more help when it comes to budgeting the proceeds of bad credit loans, check out ALC. We offer a range of budgeting and loan repayment tools that will allow you to easily manage and stay ahead of your loans.