How Much Of A Business Loan Can I Get?
Need to calculate how much of a loan you can afford? We'll show you how to calculate the borrowing amount, leverage monthly payments, and improve your business finances.
“How much of a business loan can I get?” This is the (literal or figurative) million-dollar question.
While you are exploring the best business loans, you might be weighing the different variables and realizing how tricky it can be to know how much of a business loan your business can take on without going too far into the red.
Read on to see how much financing your small business can afford and what you can do if you can’t afford a loan just yet!
Table of Contents
- Is A Small Business Loan Right For Me?
- Why Would I Need A Business Loan?
- What Do Small Business Lenders Look For?
- How To Calculate Borrowing Amount With The DSCR
- How To Calculate Borrowing Amount With The DTI
- How To Calculate Borrowing Amount With Your ROI
- What If I Can’t Afford A Loan?
- Final Thoughts
- How much of a business loan can I get? FAQs
Is A Small Business Loan Right For Me?
Before you even begin researching or trying to figure out how much you can afford, you need to ask yourself if a loan is right for your small business. Just because you can afford to take one out doesn’t mean you should.
Take the time to really consider your business’s financial situation before going any further.
- What problems would you solve by taking out a business loan?
- Are there other ways to solve those problems?
- Could you cut expenses elsewhere to solve those problems without requiring outside funding?
For example, if you’re looking for start-up funding, have you considered venture capital? Angel investors? Crowdfunding? If you’re having trouble maintaining consistent cash flow, have you carefully analyzed your operating costs or cut back unnecessary business expenses to increase revenue?
Also, have you looked into the different types of small business loans to see if there is one loan that is a better fit than another? You should go into your loan meeting armed with the knowledge of how much you can borrow and what type of loan you should get. For example, read our guide to installment loans or our guide to short-term loans.
When determining whether a small business loan is right for you, carefully meditate on your business’s short-term and long-term goals.
If you haven’t already, make a business plan to help you achieve your future goals.
Make sure to explore all of your options before jumping the gun on your loan search.
Why Would I Need A Business Loan?
Check out our reasons to get a business loan for a more in-depth answer to this question, but here is a short list of reasons you may be considering a business loan:
- To expand your business
- To purchase inventory
- To buy equipment
- To cover off-season expenses
- To take on a new, high-potential project
- To build business credit
What Do Small Business Lenders Look For?
At the most basic level, lenders want to see that:
- Your business has enough cash flow to afford monthly payments.
- You can make those payments on time.
Some of the most important variables lenders consider are your business credit score, your debt service coverage ratio, your debt-to-income ratio, and your ability to put up collateral.
How To Calculate Borrowing Amount With The DSCR
The debt service coverage ratio (DSCR) is one of the main tools lenders use to determine whether you are eligible for a loan — it’s also one of the most important calculations small business owners can do before taking on new debt. DSCR measures the relationship between your business’s income and its debt.
Lenders use this ratio to gauge the risk of lending to you and to see if you can afford to make payments on a loan.
How To Calculate Borrowing Amount With The DTI
Alongside your DSCR, lenders will use your personal debt-to-income (DTI) ratio to evaluate your business’s eligibility. The DTI ratio is a financial tool used to measure the relationship between your debt and your income.
Your DTI is typically used for personal loans but is still an important ratio for small businesses, especially sole proprietors.
How To Calculate Borrowing Amount With Your ROI
The last thing you need to consider when determining whether or not your small business can afford a loan is that the benefits outweigh the costs. If you’re spending the time, money, and effort to apply for a loan, it’s important that you have a good return on investment (ROI).
A loan is only worth it if it ultimately helps your business’s profits exceed the costs of the loan plus the interest and fees.
Before you borrow money, make sure you have your business plan solidified and know exactly how you’re going to use your loan to improve your business.
What If I Can’t Afford A Loan?
You may have come to the conclusion that your small business can’t afford a loan at this time. Don’t worry! It isn’t the end of the world, there are plenty of ways to improve your business’s financial position so you can afford a loan in the future.
Read on to learn strategies you can apply to improve your small business’s financial health.
When wondering whether you can afford a small business loan, you should ask yourself:
- Do I have a debt service coverage ratio of 1.25 or higher?
- Do I have a debt-to-income ratio of 36% or lower?
- Do I have collateral, or can I confidently sign a personal guarantee?
- Will the loan lead to a good return on investment?
If you’ve answered yes to all of these questions, odds are your business is in a healthy financial spot to take on a new small business loan. Use the debt service coverage ratio and debt-to-income ratio to discover exactly how big of a loan you can afford.
If you are experimenting with different types of loans, use our small business loan calculators to determine what you can borrow.