How Much to Borrow When Seeking a Business Loan

At some point in your business you will start to consider seeking out a business loan. Running a business and growing it takes a lot of capital. There are many factors to take into account when looking for financing for your business. Also, loan amounts differ based on the lender, type of loan, and the borrower. Because there is so much to factor in when seeking a business loan, there are some questions you should ask yourself first before applying.

How much money does your business need?

It is important to determine how much money your business needs because if you ask for too high of a number, lenders will question if you are able to repay them and it can disrupt your business’s cash flow if you have a large loan. It can prevent you from forecasting your financial future and secure a loan. If you do not ask for enough, you will trouble funding your business and can prevent you from meeting financial commitments to business partners. Create detailed projections of cuts for the use of the funds you want to borrow to find out how much your business needs. Also, prepare cash flow and profit & loss statements. This will show lenders you are responsible and informed.

How much can your business afford?

Making sure that you can make your payments on the loan is critical. Lenders will look at your debt service coverage ratio (DSCR) to see if your company is able to back the loan. If you want to calculate your DSCR, you need to know your cash flow and the amount of money you will have left to make debt payments.

Lenders also will look at your debt to income ratio (DTI) which looks at your monthly income and monthly debt (includes car payments, credit cards, mortgage, etc.). aim for a DTI ratio of 36% or lower to be safe.

What are the costs of your business loan?

Factor in the closing costs, interest rate, the total amount you need to payback. These will help you figure out how much you can borrow. Knowing the costs of a loan can help you find the best type of loan and the amount of financing you should pursue.

How long do you need the money for?

This all depends on how long it will take you to pay the loan back. The intended use of funds must be able to have a profit and show a return on its investment to be able to repay the loan back.

What are your future financing needs?

After you have the business loan, will your business need financing in the future? Sometimes the loan businesses take out is not enough to fund the company’s future expansion. This results in leaving them without the needed funds to grow. Try to project the cash flow needs over the next three years before you determine what size of loan you need. By planning ahead, you can make the best decision about financing your business now and in the future.

Average Business Loan Amounts

Now that you have answers to the above questions, you probably have a better idea of the amount of the loan your business needs. Here is a breakdown of the average business loans amount by the type.

  • SBA Loans: the business loan amount backed by the SBA is around $100,000. These loans are best for financing major business endeavors. There are two types of loans under the SBA, the 7(a) and 504.
  • Business Lines of Credit: with a line of credit you can get either small funding or large funding. The average loan amount is around $20,000.
  • Invoice Financing: with invoice financing you get up to 85% of the invoice value.
  • Equipment Financing: if you are looking to financing equipment, you will want to get equipment financing. These offer up to 100% of the value of the equipment in a loan that is required to be paid back over a period of time with interest.

Bottom Line

Avoid taking out too large of a loan and too small of a loan since either could damage your business. Answer the questions mentioned in here to help guide you and to make sure you borrow how much your business actually needs and avoid taking on more debt than necessary.