How to Calculate ROI – Making Your Small Business Loan Count

How to Calculate ROI – Making Your Small Business Loan Count
Dustin Clendenen
on April 24, 2017
Read in 3 min

Here’s a controversial thought:

Not all debt is bad debt.

Since not all of us are independently wealthy or particularly good at fundraising, business loans are a great way to quickly and easily get working capital so you can work on your goal.

How to Calculate ROI & Why Business Loans Shouldn’t Be Viewed As “Bad Debt”

There’s an old saying that in order to make money, you have to spend money.

But if you don’t have money to spend or the ability (or desire) to bring in investors, the only other option is to take on some debt.

The idea of debt might be utterly terrifying, but keep in mind that even successful, well established companies utilize business loans in order to expand.

If you know how to calculate ROI on a major expenditure, you can easily apply the same logic to financing.

Expressed as a percentage, ROI is equal to the benefit (or return) of an investment divided by the total cost.

For Matt Ham, President & Owner of Computer Repair Doctor, taking out a business loan to grow his company was a no-brainer.

“Frankly, the idea was pretty simple.

We operate a few stores and we’d had success with each store individually.” he said.

“Looking at our business model, it seemed that the best way to grow was by increasing our footprint and opening more stores in new locations to multiply our success.

Using loans, we were able to open new stores and start growing those locations into the same levels of success that we saw with our original locations.”

If you already have a successful and established business model to follow with a reasonable expectation of how following it will affect profit and cashflow, taking out a business loan to expand could practically be risk-free.

How to Calculate ROI – Why Business Loans Can Actually Be A Great Investment

Even if you don’t have a tried-and-true business model to follow based on your own experience, taking out a business loan might be the only way to get your venture off the ground.

Just be prepared to work for it.

“I could not have started my business without a business loan,” says Michelle Griffith, former firefighter and now owner of Firehouse Grilling Co., a Cleveland-based food truck concept run out of a converted fire-engine.

The unusual concept, not to mention the calculated risk of taking out a business loan, paid off in a big way.

“We started running the food truck in June of 2016, [and needed to take out a starter] loan for $60,000,” Griffith explained.

“Because food trucking is a seasonal business, we didn’t run the truck in the winter. [But] in less than five months my revenue was $168,000! Not a bad ROI!”

Learn more about Small Business Loans for Women

How to Calculate ROI – Small Business Loans Help You Hold On To Equity

Taking on debt can always be risky, but as long as you can pay it off, it keeps you in full ownership of your business.

“When we launched our business two years ago we had no money and no outside capital to get started with,” explains Bryan Clayton CEO of GreenPal, an app that acts as ‘the Uber of lawn care.’ 

Like most tech startups, they went on the fundraising circuit talking to angel investors and venture capitalists begging for money to get started.

He said, “However, our vision was just too broad in scope and we got turned down and told ‘no’ over 40 times.”

“I was fortunate enough to have solid personal credit, and this enabled my team to secure an unsecured line of credit for $85,000 to get our business started,” Clayton explained.

“We went this route versus a credit card because we could only secure $25,000 on a credit card and we needed $80 – $90,000 to fund our first six months and get our beta version of our app built.

We paid that off in the first year, and this year we’re going to surpass $3 million in annual revenue.

Good thing early investors told us ‘no’ because with their capital they would have owned and controlled 30% of our business.

Because we are self-funded, my cofounders and I own it all.”

Learn more about The Way Banks View Your Small Business

How to Calculate ROI On Your Small Business Loan

There are many factors that determine how to calculate your ROI, ranging from your confidence in your endeavor to your ability to secure low interest loans.

Taking out a business loan need not be as nail-biting form of getting capital as you think, however.

Because ultimately, what will your ROI be if you fail to start or grow your business with the capital needed to do so?

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Dustin Clendenen Finance Journalist

Dustin Clendenen is an LA-based screenwriter, editor, and all-around storyteller.

He spends most of his time thinking about the “Big Picture” and obsessing over its details.

Follow his musings on Twitter.

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