How to work out how much to borrow

“How much do you need?” sounds like the easiest question on the call. It’s often the hardest. Ask for too little and you’ll run out halfway through the job and have to go back — often at the worst moment. Ask for too much and you’re paying for money you don’t use, and a lender may doubt the plan.

Here’s a simple, five-step method to get to the right number.

Step 1: Cost the whole job, not just the headline

Start with the obvious cost, then keep going. For most business funding, the “real” cost includes several extra lines.

Buying equipment or a vehicle

• Purchase price (GST-inclusive if you’re paying GST up front).
• Delivery, installation, signwriting, fit-out of a vehicle.
• Registration, WoF or CoF, insurance.
• Training and downtime while it’s commissioned.

Buying a business

• Purchase price, including goodwill and plant.
• Stock at valuation (often higher than estimated).
• Legal and accounting fees for due diligence.
• Working capital for the first months while you learn the business.

A fit-out

• Design, consents, the build and every trade.
• Equipment and furniture.
• Rent on the new premises before it opens.
• Staff hired before opening, opening stock and marketing.

Clearing tax or debt

• The full payout figure, including penalties and interest to the settlement date.
• Any early repayment costs on other debts being refinanced.

Step 2: Add the costs of the loan itself

Loans have their own costs — establishment, legal, registration and valuation fees, for example. Some are deducted from the advance. Ask your specialist for an estimate so the amount that actually lands covers what you need. Every loan is priced on the individual situation, so these vary.

Step 3: Deal with GST timing

If you’re GST-registered and buying something large, you’ll pay the GST to the seller now and claim it back in your next return. For two-monthly or six-monthly filers, that can be a meaningful gap. Some owners fund the GST-inclusive amount and then repay part of the loan when the refund arrives. Check timing with your accountant.

Step 4: Subtract what you can safely contribute

What cash can you put in without leaving the business short for wages, tax and suppliers? Be honest. A contribution that leaves the account empty just moves the problem to next month. Your cash flow forecast will show you what’s genuinely spare.

Step 5: Add a buffer

Projects run over. Stock costs more. Customers pay late. A sensible buffer protects you from having to go back for more mid-project. The right size depends on the risk: a fixed-price equipment purchase needs less; a fit-out in an older building needs more.

Put it together

Illustrative figures only.

Then check it’s affordable

The amount is only right if the repayments fit. Work out:

1. Your average monthly surplus — money left after all running costs, tax, wages and existing debt repayments. Use recent bank statements, not hope.
2. The likely repayments on the amount — your specialist can give you realistic figures for different structures.
3. The gap — repayments should fit comfortably inside the surplus, with room for a bad month.

If they don’t fit, you have options: a longer term, a smaller amount with a bigger contribution, staging the project, or funding that’s structured around when the new income starts.

And check the exit

For short to medium-term lending, the lender will ask how the loan is repaid in full. Have a clear answer: trading surplus over the term, a known payment, a refinance to a bank once there’s a track record, or the sale of an asset.

What the lender will size it to

Your number also has to fit the lender’s view:

• Property-secured loans are sized to available equity, from $20,000 to $1m.
• Unsecured loans and lines of credit are sized to turnover and bank statements.

If your number and the lender’s number don’t match, a specialist can help you bridge the gap — for example, combining a property-secured loan with an unsecured facility.

Common mistakes when sizing a loan

• Forgetting working capital. The purchase is funded, but there’s nothing left to run it. This is the most common mistake with business purchases and fit-outs.
• Using best-case numbers. Quotes go up, stock valuations come in higher, and customers pay later than promised.
• Ignoring GST timing. Paying GST on a big purchase and waiting two months for the refund can leave a gap.
• Borrowing the maximum offered. The amount a lender will offer is a ceiling, not a target.
• Not matching the term to the asset. Funding a short-lived item over a long term, or a long-lived asset over a very short term, both cause problems.
• Changing the number mid-application. Asking for more after approval usually restarts the assessment. Do the maths first.

Bring your number to the call

You don’t need a perfect figure to ring the Hotline, but having worked through these steps makes the conversation far more productive. Or request a call back.