When you’re exploring financing options like 504 SBA loans for your business, one of the key factors lenders look at is your net worth. But what exactly does that mean? Your net worth is simply the value of everything your business owns, minus the total liabilities or debts. This provides a snapshot of the financial health and stability of your company.
Why Net Worth Matters for Borrowing
Lenders want to see that your business has the means to repay any loan, and your net worth offers evidence of your ability to generate profits and cash flow. A higher net worth indicates your business has assets it can leverage if needed and shows you’ve built equity over time. Simply put, the better your business’s net worth, the lower the risk for a lender providing a 504 SBA loan or other financing.
Net Worth Limits for 504 Loans
Speaking of 504 SBA loans, there are specific net worth requirements to qualify for this beneficial financing option. To be eligible for a 504 loan, your business must have a tangible net worth of less than $15 million, according to the Small Business Administration. Tangible means only counting the value of physical business assets, not any intangible intellectual property or goodwill value. This net worth cap ensures these loans really benefit small- and medium-sized businesses rather than large corporations.
How to Improve Your Business’s Net Worth
If your net worth is currently lower than you’d like, there are strategies you can use to give it a boost. Pay down liabilities like loans or lines of credit to reduce your debt obligations. Avoid taking out new long-term debt whenever possible, and invest surplus profits back into long-term physical assets. Build up your inventory stock to increase assets, and take out credit insurance to boost the value of your accounts receivable. The more you can do to minimize liabilities while maximizing tangible assets, the higher your net worth will climb over time.
A healthy net worth position makes acquiring a 504 SBA loan much easier while also providing stability and resources to grow your business. Keep net worth top of mind as you manage your company’s finances and operations. This key indicator offers a lot of insight into the current and future state of your business. To learn more, get in touch with MCDC today!