Effective gross income (EGI) is an important factor in small business financing because it is used to forecast an asset's positive cash flow. It is important to know whether or not the property you are considering purchasing can generate enough positive cash flow to cover its operating expenses and turn a profit. EGI may not be the only metric used for this purpose, but it is definitely unique in its inclusion of potential losses caused by vacancies or partial payments.
For instance, if a small business is looking to purchase a commercial property, they can use EGI to determine whether the property can generate enough income to cover its operating expenses and turn a profit. This can be done by calculating the EGI in one of two ways: a simple EGI calculation or a complex EGI calculation. A simple EGI calculation would involve taking rental income, adding other income, and subtracting the property’s vacancy. A complex EGI calculation would involve more of the factors mentioned above, and would take potential market rental income and subtract loss to lease, vacancy, and credit loss, while adding any other income generated by the property.
By using EGI to forecast an asset's positive cash flow, small business owners can make more informed decisions when it comes to financing a commercial property. This can help them to determine whether the property is a good investment and whether they can afford the loan payments.