How much loan can I get for my business?
Wondering how much of a loan your business can afford? Read on to learn how big of a business loan you can expect to get.
Wondering how much of a loan your business can afford? Read on to learn how big of a business loan you can expect to get.
As a business owner, you’ve probably wondered: how much of a small business loan can I get?
The amount of loan you can get for your business depends on creditworthiness, existing debt, and gross sales. Most lenders typically limit loan amounts to between 10% and 30% of the business’s annual revenue. They’ll also require proof that your company has positive cash flow after deducting all debts.
As far as amounts, you can get short-term loans that start from $5,000 all through long-term credit cards of up to $100,000. It all depends on what your business needs and what it can qualify for based on its creditworthiness, existing debt and gross sales. Besides, exact loan amounts differ greatly from one lender to another.
That’s the thing about business loan agreements – each product is unique. However, there are a few general rules of thumb that you can use as guides. In this article, we answer one of the most asked questions by entrepreneurs: how much loan can I get for business?
There are several types of loans available for small businesses. Depending on your sales, creditworthiness and value of debt, you can seek out short-term loans, medium-term loans, bank term loans, bank lines of credit, SBA loans, or business credit cards. Each of these loans comes with a different loan limit. Here’s a more detailed breakdown, including the estimated amount to expect for each:
Amount to expect: $5,000 to $500,000
Best for: instant cash injection for emergencies, paying bills, expenses, payroll, supplies, and inventory.
The biggest advantage of short-term business loans is that they are easier to get compared to other loan options. You can get approved in a few days – instantly even, by some online lenders. For this reason, short-term loans offer a great way of getting capital injection.
On the flipside, short-term business loans do not carry large amounts. Lenders typically offer money that ranges from 10% to 15% of your gross sales. This fairly small amount makes such loans good for meeting emergencies like coronavirus mitigation. Your business can also use a short-term loan for payroll, to buy inventory, pay recurring bills, finance supplies, and other short-term needs.
The repayment period for short-term loans ranges from one to two years, which makes them suitable if you do not want to be tied to a repayment plan that runs for three or more years. Another benefit of short-term business loans is that they are generally flexible when it comes to qualification standards.
Most lenders do not have stringent qualifications, which makes it easier for a wide range of small businesses to qualify for. On the downside, short-term loans have a higher interest rate compared to other financing options.
Amount to expect: $5,000 to $500,000
Best for: funding growth activities like marketing campaigns and acquiring revenue-generating assets like equipment
There’s no big difference between the amount that you’ll get in a medium-term loan and a short-term loan. As such, medium-term loans also have fairly fast turnaround times of between three and five years. So, while you get a little more time to repay the loan, it’s not exactly a long-term repayment plan.
However, that doesn’t make these two loan options similar. For one, mid-term loans typically carry a lower interest compared to short-term loans. This works to reduce your monthly payments, which can be great for easing pressure on your cash flow. But the longer repayment period may still see you pay the same (or even more) interest as you would with a short-term.
Medium-term loans require higher creditworthiness because lenders typically offer higher amounts – 20% to 30% of your business’s gross sales. These high standards tend to lock out companies that do not have solid sales and haven’t had enough time to build their business credit scores. That said, most lenders will allow you to use your personal credit when applying for a medium-term loan. But that too has to be great.
Amount to expect: $5,000+
Best for: high-value capital purchases
Online and fintech lenders are continuously becoming synonymous with short- and medium-term business loans. However, traditional bank loans still exist for business owners who may be interested. Like other loans, bank term loans offer your business a lump sum amount that you can use. It’s typically a big amount ($5,000 to millions of dollars), which makes bank loans great for one-off, high-value capital investments.
You can, for example, use a bank term loan to purchase expensive equipment, open a new branch, acquire a building, or buy company motor vehicles. That said, banks have varying terms and conditions, which means that the exact amount you can qualify for greatly varies from one institution to another. You’ll need to repay the amount, including interest, over a pre-specified fixed period of time.
As you’d expect, banks do have stringent qualification requirements, especially if you’re looking to get a large dollar amount. Alongside a good credit score and profitable sales, they’ll also look at your debt service coverage ratio (DSCR). Your DSCR is basically the ratio of available operating income to debt servicing for principal, interest and lease payments.
DSCR = net operating income / debt service
A DSCR of over 1 means that your income is sufficient to cover all your debt payments. On the other hand, if the ratio is under 1, it means that your business is not making enough income to meet its debt payments.
Most banks will ask for a DSCR of at least 1.1. This implies that your annual revenue is more than your debt payments by 110%. They’ll also limit your loan amount so that your business’s DSCR doesn’t exceed 1.1. In a few cases, and specifically to sole proprietors and independent contractors, the bank may include your personal income and debts when calculating your company’s DSCR.
Something else to keep in mind is that banks may ask you for down payment for certain loans, particularly loans for purchasing physical assets. For example, you may need to put down 5% to 20% for a term loan for purchasing a building. The upside is that interest rates for bank term loans are often the lowest on the market. They can go even lower if you can raise the down payment.
Amount to expect: $5,000 to 1 million
Best for: accessing a revolving fund “on demand” when you’re continually facing cash flow issues
The difference between business lines of credit and other loans is that credit lines do not offer a lump sum amount. Instead, the lender gives you a revolving credit facility that you can draw upon whenever you need cash.
Want to learn more about business lines of credit? Check out this complete guide.
If, for example, your business has been hit hard by the COVID-19 pandemic, you can turn to a line of credit to meet some of your expenses. The lender will allow you to regularly draw cash whenever the business doesn’t have sufficient money to meet its expenses. Since you can regularly tap into the fund, a business line of credit (LOC) is great if your company continually faces cash flow issues.
Once you’re approved for a line of credit, you can access that cash “on demand” for a specified period, known as a draw period. A draw period can go as long as five years, making a LOC not just flexible, but an excellent source for peace of mind.
You’ll only pay interest on the amount you use. This feature makes a line of credit potentially cheaper than a loan. The lender may also consider your credit score, your company’s credit, revenue, projected revenue, collateral (in the case of secured business lines of credit).
Amount to expect: up to $5 million
Best for: working capital, expansion, inventory purchase, and acquisition of fixed assets
The Small Business Administration (SBA) doesn’t actually generate loans. Instead, these loans are issued by private lenders (including banks) and backed by the federal government through the SBA. The administration guarantees anywhere between 50% and 85% of the loan, up to a maximum of $3.75 million. And if you can cover the rest with a down payment, you can easily get up to $5 million for your small business.
SBA lenders often feel incentivized by the federal government’s guarantee. For that reason, these loans typically come with long repayment terms, low interest rates and fair monthly payments.
There are six different types of SBA loans: SBA CDC/504, SBA CAPLines, SBA Export Loans, SBA Disaster Loans, SBA 7(a), and SBA Microloans. The latter two are by far the most common, with the SBA 7(a) edging microloans in popularity.
The 7(a) offers up to $5 million that you can use for a variety of business needs. This large borrowing amount makes this loan a viable option if you’re on an expansion project. You can use the funds to acquire a new building, open a new branch, purchase inventory in bulk, buy high-cost fixed assets like motor vehicles etc. You can even use it to refinance an already existing business debt.
SBA microloans provide amounts of up to $50,000, with the average microloan standing at $13,000. This is a great alternative to the 7(a), especially if you want some capital injection but don’t want to take the huge, long-term liability that comes with the SBA 7(a).
As you would expect, 7(a) loans are harder to qualify for because of their sheer size. In addition to SBA rules and regulations, individual lenders typically have their own requirements. Your DSCR will play an important role in your qualification as well as the amount you can receive. Oftentimes lenders will ask for at least 1.15. The SBA has also mandated a minimum 10% down payment on all its loan products. Depending on what you need, you may have to front a bigger down payment – like 25% or more. This is especially a necessity when purchasing high-cost fixed assets like business premises.
Amount to expect: up to $100,000
Best for: meeting business purchases and bills while also earning rewards
Business credit cards work much like business lines of credit. Your company gets access to a specific amount of cash that you draw upon as needed. It is a revolving fund, which means that you’ll have to repay a minimum balance each month. Just like a line of credit, you only pay interest on the amount you have used.
Business credit cards are excellent options for making business purchases and paying business bills. They offer the same convenience that you get when you have a personal credit card. This makes them invaluable for small businesses. In fact, business credit cards are often the only available financing for new businesses that haven’t had the time to build their credit or record big sales numbers.
This, however, doesn’t mean any business can automatically qualify for a credit card. Lenders will still look at the business’s creditworthiness. If not, then they’ll look at your personal income, credit history etc. They also check the company’s debt-to-income ratio (DTI) to determine that your business has enough income to repay credit card balances. Generally, a DTI of 36% or below is considered good and may get you approved with good terms.
One consideration with business credit cards is that they typically carry high interest rates compared to other options line online loans. The tradeoff is that business credit cards do put instant cash in your hands.
Qualifications vary depending on the type of loan, the business lender, your creditworthiness, and the amount you’re applying for. Below is a breakdown of what to expect based on each type of loan.
Term: short-term loans have a typical repayment period of 12 to 24 months
Interest rate: averages between 3% and 7% but can go as high as 30%+
Credit score requirements: most lenders have a soft spot for a FICO score of 550 and above. You’re likely to score better terms with a higher credit.
Down payment requirements: not needed
DTI: most lenders won’t offer a short-term loan if your debt-to-income ratio is higher than 43%
Revenue requirements: varies from lender to lender, but in general, ranges from $25,000 to $150,000 per year
Time in business: the typical short-term business lender will need you to have been in business for at least one year
Repayments: monthly, with a few lenders requiring weekly or bi-weekly payments
Paperwork: up to three months of bank statements
Processing time: you can get the funds within one to three business days.
Term: mid-term loans have a repayment period of three to five years
Interest rate: mostly start at 10% and run through 40% APR
Credit score requirements: standard qualification requirements include a personal FICO score of 600 and above.
Down payment requirements: not needed
DTI: most lenders require a debt-to-income ratio of 36% or less, but you can still get approved with 43%
Revenue requirements: depends on the lender, but most ask for at least $25,000 per year
Time in business: you must be in business for at least two years before applying
Repayments: mostly monthly, but some lenders might ask for more regular payments
Paperwork: to complete application, the lender may need business and personal tax returns, current balance sheet, income statement, and bank statements.
Processing time: approval generally takes two to three days, followed by funding which can take up to a week.
Term: can run from five to 20 years
Interest rate: ranges from as low as 2.5% to as high as 100%. It depends on the bank, amount and your qualifications
Credit score requirements: most banks will require a PayDex score of at least 80 and/or FICO score of at least 600. A score of 750 gives you a strong edge.
Down payment requirements: not needed, unless you’re applying for asset financing. The bank may need you to put 3.5% to 20% down, depending on the total loan amount and your qualifications.
DTI: preferably 36%, but banks may still lend to you if you have up to 50% debt-to-income ratio. They’ll consider other factors like revenue.
Revenue: the rule of thumb is at least $100,000 in annual revenue
Time in business: the preferred threshold is two years. The longer you’ve been in business, the better your chances of landing favorable loan terms.
Repayments: long-term loans require monthly payments, but you can increase the regularity. Just make sure that the lender doesn’t have prepayment penalties.
Paperwork: prepare your business’s year-to-date income statement, the latest balance sheet, tax returns and bank statements. Some banks will ask for more documentation.
Processing time: long-term bank loans can take seven days or more to get approved. However, you can pre-qualify in two days or few.
Term: the draw period of a business line of credit can run for as long as five years
Interest rate: the typical business line of credit interest rate starts from 10% all through 99% APR. Unsecured cards often carry higher rates.
Credit score requirements: although most lenders don’t set a minimum credit score for business lines of credit, those who do don’t ask for a high score. 500 FICO is more than decent to get this type of loan.
Down payment requirements: you don’t need to make a down payment for a business line of credit. But the lender may ask for collateral (in the case of secured line of credit).
DTI: to be approved for a business line of credit, you must have a debt-to-income ratio of between 36% and 50%.
Revenue: the golden rule is at least $25,000 in annual revenue for your business line of credit to be approved. However, some lenders – particularly online lenders – won’t ask for nearly as much as $25,000.
Time in business: you’ll need at least six months in business
Repayments: monthly payment schedules are common, but you can do weekly and bi-weekly payments. Ultimately, the lender will set a minimum monthly balance to meet.
Paperwork: your lender may ask you to submit bank statements, financial statements, tax returns, and your driver’s license.
Processing time: when you apply online, you’ll typically get a response within a day or two. Physical application may take a week or more.
Term: up to 25 years for SBA loans that are meant for real estate acquisitions, including property. Most other SBA loans top out at 10 years.
Interest rate: the current prime rate for SBA loans is 3.25%.
Credit score requirements: SBA loans are so competitive, which naturally pushes credit score requirements high. You’ll likely need a personal FICO score of at least 720 and/or an SBSS of 140 or above.
Down payment requirements: at least 10%. May increase depending on the loan amount.
DTI/DSCR: SBA loans require a minimum DSCR of 1.15. Some lenders will ask for a higher rate than that.
Revenue: your average revenue must be less than $7.5 million per year for the past three years.
Time in business: while the SBA doesn’t specify how long you should have been in business, most lenders require at least two years.
Repayments: you’ll need to make monthly payments. As a guide, the payments must be at least 2% of the guaranteed portion for loan amounts of between $150,000 and $700,000. The percentage rises to 3% for loans between $700,000 and $1 million, and 3.5% for any amount above $1 million.
Paperwork: SBA loans require intensive paperwork which includes SBA form 1919, personal and business financial statements, business income statement, certificates and licenses, loan application history, tax returns, resume, business overview, and business lease.
Processing time: generally, the entire SBA loan process takes between 60 and 90 days.
Term: the general draw period of business credit cards ranges from two to five years.
Interest rate: business credit card rates range from 13% to 30%. Some will go as high as 100%.
Credit score requirements: most business credit cards are targeted for entrepreneurs with good credit scores – typically 670 and above. But you can get lenders – especially online lenders – who don’t check credit.
Down payment requirements: a business credit card does not require a down payment.
DTI: the rule of thumb for business credit cards is to keep your debt-to-income ratio at or below 43%.
Revenue: it’s possible to qualify for a business credit card with zero revenue, especially if your business is new. But this will require security (collateral).
Time in business: you can apply for a business credit card even if your business is new. Most lenders don’t consider your time in business.
Repayments: your card balance isn’t due as long as you make minimum monthly payments. Oftentimes it’s the lender who will calculate your monthly minimums.
Paperwork: apart from proof of legality, you may need to provide your EIN, income statement, annual revenue estimates, personal income statement and personal credit.
Processing time: this wholly depends on the bank. You can expect a decision anywhere from a few minutes to seven business days.
So, if you’re still wondering how much loan you can get, just refer to the qualification requirements above and you’ll get a rough idea of the type of loan that your business qualifies for. Of course, each type has a standard loan amount that you can use as a ballpark.
Lenders approve the highest loan amounts to businesses that they deem are the most creditworthy. In essence, if a lender thinks that your business is able to meet its debt obligations, they’ll qualify you for a large business loan amount.
On the other hand, if your business is likely to struggle with loan payments, the lender will probably deny your loan application. So, it really boils down to your creditworthiness.
Which raises the question, how do lenders determine the creditworthiness of a business? They basically use your company’s credit history, revenue, debt-to-income ratio (or debt-service coverage ratio), time in business, and potential for growth. All these things create a reliable perception of your ability to repay a loan on time.
And, of course, if those metrics have good figures attached to them, a lender is likely to qualify you for a large loan amount. For example, the higher your revenues and credit scores, the more amount you can borrow. Similarly, if your DTI is low – 36% or less – you can easily get your hands on a large loan amount.
Keep in mind that a lender can still qualify your business even if you don’t have the most impressive numbers. But oftentimes they’ll ask for collateral (security) for the loan. Collateral may be a business asset like equipment or a personal guarantee. Should you decide to use personal guarantee, the lender is within legal rights to possess your personal property if you default on a business loan. This is never good, and it justifies the need to separate business finances from personal finances.
Check out our complete guide on how to protect personal assets from business liabilities.
If you do not have enough business assets to qualify your company for a big loan amount, you can try applying for an online loan. Most online lenders don’t require physical assets as collateral. But they’ll need a personal guarantee that you’ll repay the loan in full.
When all is said and done, there’s only one answer to the question: how much loan can I get for business? It’s not a one-fits-all situation. There’s no single formula that lenders use to determine loan amounts. Therefore, the amount you can get will vary from one lender to another, based on the type of loan you’re applying for, and depending on the unique circumstances of your business.
One gloomy fact is that only 27.9% of small business loans are approved. However, you can take steps to ensure that your company is eligible for as many business loans as possible and for the largest amounts available. Here are a few things that you can do:
There are a number of ways of building business credit, including repaying loans on time and using business credit cards. A good score will put you in contention for large amounts with favorable loan terms. Ultimately, aim for a PayDex score of at least 80. While at it, don’t forget to improve your personal score as well. Lenders will reference it when approving your business loan. Anything above 700 is more than decent.
Perhaps the surest way of making your business eligible for big loan amounts is by increasing its revenue relative to expenses. The more income the business gets, the better it can handle its debts. And that’s what lenders want to see – a business whose cash flow can easily meet loan payments.
Not sure how to increase business revenue? Here’s everything you need to know to grow sales.
Ideally, you want your business to record an annual revenue of at least $25,000 to easily qualify for short-term loans. If you’re aiming for large loan amounts, then your target revenue should be at least $100,000.
Alongside revenue, DTI indicates your ability to pay debts. If most of your income goes to servicing already-existing debts, a lender will perceive that you’re in no position to handle new loans. You can improve your company’s DTI by increasing revenue, lowering expenses, and paying off (or refinancing) current loans. Most lenders will want a DTI of between 36% and 50%.
Lenders are more willing to extend loans when you put some money down. It lowers the risk you pose to them, which means they’re more likely to approve your loan application. Plus, the more down payment you make, the less principal and interest you have to pay each month.
These small business tips will help your company grow and be eligible for a wider variety of loans and with favorable terms. Remember, loans help small businesses grow. Credit is not bad, as long as you get a competitive (affordable) product and use it wisely.
For more tips on how to manage and grow your small business, check out our blog.