Knowing Your Finances And Its Effect On Maximising Your Borrowing Capacity

Managing your finances is a necessary step in protecting yourself and your business. There is a feeling of security and stability if you know that you have control over this matter...

Managing your finances is a necessary step in protecting yourself and your business. There is a feeling of security and stability if you know that you have control over this matter. If you have a good financial history, maximising your borrowing capacity will be achievable.

If you look for the definition of finance in the dictionary, it will give you a definition of money or other resources of a government, business or individual. Actually, finance is a broad term that concerns money, investment, expenses and credit. It involves money management and the allocation of resources.

Know These Three Categories of Finance

To better understand what finance is, let’s go over its three main categories.

  1. Personal Finance – this refers to the process of managing an individual financial activity like income, saving and investing. This can involve understanding his current financial position to better plan future needs. The main goal of knowing one’s personal finances is to make wise decisions to improve one’s situation and to stay within a safe range without getting bad debts. Giving personal finance great importance is essential in maximising your borrowing capacity from lenders and banks.
  2. Corporate or Business Finance – refers to all financial activities of running a corporation or business. It covers funding, acquisitions, investments, budgeting, risks management and tax details. In this matter, all activities should focus on the business long-term goals and attaining balance between risk and gaining profits. Various aspects like the economic market, financial institutions and customers are also taken into account to achieve business growth, increase the value of the business and of course, sustainability.
  3. Public Finance – pertains to the financial activities of governments and other public authorities. This includes taxing, revenue, expenses, funding of expenditures and also debts. By taking control of these aspects, government institutions can track their activities in the services they provide the general public and also maintain economic stability.

Taking hold of your finances is also part of taking control of your life. It takes a lot of knowledge and effort to make sure you stay in the safe range.

At DDDC Finance, we take great pride in our professional team that can guide you with your finances.

How to manage your business finance

As stated by Woodruff (2019) [2], financial management is an important responsibility of business owners and managers. Every decision they make should take into consideration the business profit, expenses and current business financial situation.

Businesses experience profit gain and loss, especially during their starting year. Financial management is extremely crucial during this time for the business. Business owners and managers must be knowledgeable about the business and cash flow.

Finance is the lifeline of any business. The health of the business will depend on the status of their finances and for them to have smooth sailing progress and growth.

So here are some tips on how you can keep your business finances healthy.

  1. Understand your financial reports

Financial reports include your balance sheet, income statement and your cash flow. Knowing them means understanding the current situation of your business. You get the whole picture of where your business is at and what are the factors that have positive and negative effects on your production.

  1. Manage your cash flow

Of course, understanding your statements is one part and the other one is managing your money. It is important to know how much money is coming into your business and how much is going out. When your finances go out of hand, this will have a serious effect on your business. And it can even cause your business to shut down. Meeting your financial obligations is also necessary in keeping your suppliers’ trust. This is also a factor to consider to have the capacity of maximising your borrowing capacity to gain more business funds.

  1. Devise an operational budget

Your budget should be realistic and must be followed as getting ahead of it could create disorder in your whole business health. When creating your budget, think of it as a way towards your business goals. It will guide you in handling your profits and properly allocating them.

  1. Measure your business progress

When you monitor your progress regularly, you can see factors that have undesirable effects on your business. And when you know them, you can make necessary changes to lessen and block their effect. Monitoring allows you to create solutions for possible risks and helps in improving your business status.

How can you maximise your borrowing capacity?

Whether you are borrowing for personal use like home or your business, you would always want to maximise your capacity. Banks and lenders look at various aspects in evaluating applicants. Financial management can help improve your capacity and will give you more options.

Let’s go over some smart ways on how you can maximise your borrowing capacity.

  1. Know and improve your credit score

By knowing your credit score, lenders will have an idea of your current financial situation. Of course, lenders prefer those with a higher credit score. It is important to keep track of this as this takes time to improve. Your credit score also shows how responsible you are in meeting your financial obligations. So, maintaining a healthy one is a big factor in determining your borrowing capacity.

  1. Pay off debts

Normally, lenders prefer those who don’t have an existing loan or the monthly loan payment is low. Debts like credit cards and other personal loans are expensive and they can affect your monthly payment capacity. So work on paying off or reducing your high-interest loans to increase your borrowing capacity.

  1. Organise your finance details

Get hold of your financial records and statements, complete your tax returns on time and get a copy of your present income advice (payslip). Lenders want to see evidence of your capacity to repay the finance so they would want to get information about your available cash flow.

  1. Increase your savings

If you have genuine savings in the account, the better this will look and your borrowing power will increase since lenders can see that you can repay them. Increasing your source of income is a good idea and also cutting your expenses so you can save more money.

Your borrowing power is an important factor when you want to buy a property or get a business loan. And the greater your borrowing capacity, the more options will be available to you.

There are ways on how you can maximise your borrowing capacity. Let us help you with this.

Sources:

[1] Kurt, D. (2021, April 1). What Is Finance?. Investopedia.

[2] Woodruff, J. (2019, January 28). Why Is Financial Management So Important in Business?. Chron.

[3] Houston, M. (2020, December 10). How To Manage Your Business Finances In 4 Easy Steps. Forbes.

[4] Treece, K.,Tarver, J. (2021, May 24). Understand The 5 C’s Of Credit Before Applying For A Loan. Forbes.

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