Business Loan: How Much Can Your Business Get?
You know that your business needs capital to grow and you probably know how much you want in a business loan
. But, the real question comes down to; how much can your business actually get?
Trying to determine how much in a loan your company can qualify for is really easy if you understand how banks and other lenders look at your businesss cash flow when making loan decisions.
Banks always look at cash flow first. They want to make sure that your business has the wherewithal to make the loan payments. If your business cannot make the loan payments, they will not approve your loan no matter how good your credit is or what you think your business can accomplish with the additional capital.
Business Loan Underwriting:
In analyzing a businesss cash flow, a lender wants to see true cash flow.
Thus, a lender will take your businesss net income (after all expenses operating and other) and add back any non-cash items like depreciation or non-reoccurring items like one-time charges any item that does not effect the cash flow from daily operations of the business.
These lenders will then use this figure (this cash flow number) to determine the businesss ability to service the requested business loan.
(Note: Know that lenders will use past business results for these calculations it is assumed that if your business could have serviced the loan in the past then there is a strong likelihood that your business could do the same going forward).
Example: If your business is requesting a loan of say $100,000 for five years, then your monthly loan payment would be $2,125.
If your business has cash flow enough to cover this payment (as calculated above) then your business has a chance of getting approved for that loan.
What does this have to do with figuring out how much your business can qualify for?
If you understand your lenders approval process, then you can work this process backwards to calculate a loan amount (the unknown) based on your cash flow (something you do know and can calculate).
Simply calculate your businesss true cash flow as shown above by adding back non-cash items to your net income.
Then, take that cash flow figure, working backwards, and determine the maximum loan amount your business will qualify for based on that figure.
There are several ways that you can calculate your maximum loan amount:
1) Use a spreadsheet program like MS Excel. You use the payment function to calculate a fictitious loan using any loan amount and your desired interest rate and loan term. Then, using the programs goal seeking function, you can estimate the loan amount based on your cash flow figure (leaving the rate and term unchanged).
2) Use a financial calculator and input your desired rate and term and then use your cash flow figure as the reoccurring payments. Then simply let it (the calculator) calculate the Present Value (PV) of those payments.
This PV is your estimated loan amount.
3) Trail and Error. Use an online loan calculator (like this business loan calculator) and keep changing the loan amount until the resulting payment matches your cash flow figure. Increase the loan amount for larger cash flow numbers or lower the loan amount for smaller cash flow numbers.
Lets Look At Some Examples:
Lets assume an interest rate of 10% and a loan term of three years or 36 months.
If your cash flow is $2,000 per month, then your maximum loan amount would be $62,000.
If your cash flow is $5,000 per month, then your maximum loan amount would be $155,000.
If your cash flow is $10,000 per month, then your maximum loan amount would be $310,000.
While this is kind of a back of the envelop calculation it does not mean that your business will actually get approved for this amount as there are many other factors in getting approved for a business loan. But, this simple calculation will help you better understand how much in a loan your company could get.
Then, based on this estimation, you can either proceed with your
business loan request if this amount will meet your needs or if it doesnt, manage your business to improve its cash flow until it can qualify for a higher loan amount.
by: Business Money Today
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