The loan amount usually is the total amount of money needed to begin the business less the amount supplied by you in the form of equity. The term of the loan is based on the use of the proceeds and the percent of interest reflects the general risk involved. It is advisable to speak with lenders and those offering business advice to help determine realistic terms and current interest rates for your situation. For our example, we will use $30,000 as the amount of the loan requested and a term of five years at 15 percent annual interest rate. The calculation of the annual payment is as follows:
$30,000 over five years at 15 percent $30,000 / .023790* = $713.70/month $713.70 x 12 months = $8,564.40/year
*(.023790 comes from loan amortization tables which are available at local bookstores or in most finance textbooks.) This $8,564.40 represents the total interest and principal repaid on the loan the first year of operation. If we round this figure to $8,600 and estimate personal living expenses to be withdrawn from this business at $15,000, we have a total of $23,600 which must be generated to sustain our personal needs and keep current with the lender. The next step is to determine the level of sales necessary to earn the $23,600. From industry statistics, we can ascertain average performance data for various types of business operations. One of the most commonly used sources for this information is Annual Statement Studies , published by The Risk Management Association. Other sources can be found in the library and include Dun and Bradstreet, Industry Norms and Key Business Ratios™, the Almanac of Business and Industrial Financial Ratios (CCH) and local and national trade associations. Be sure to determine that the industry standard being applied includes the owner’s draw as a part of profit. If it does not, this withdrawal amount will have been deducted as a salary expense in the operating statement and will have to be added to the stated profit to get an accurate indication of the total percent of sales available as profit to the business owner. For our example we will assume the industry sources show that, for the type of business under consideration, the average profit, including the owner’s draw or salary, is 11 percent of sales. To determine required annual sales volume: $23,600 is 11 percent of X X = minimum required annual sales .11 X = $23,600 X = $214,500 We have now determined that, if our proposed business is assumed to be average, we will need to sell $214,500 of our products or services to cover expenses, keep our loan current through the first year and withdraw the desired $15,000. This in no way implies that we will sell $214,500, of products or services, but this dollar amount serves as a goal that must be met. We now have available a minimum target sales figure to test and verify through the techniques of market analysis. For some, it will be readily apparent that the required sales target is not realistic. For others, careful market research will be necessary before any conclusion can be drawn.
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