Business Loan Calculator

Determining how much a bank will loan to your business

The first thing you should figure out is how much you think your business can afford. This can be sobering and uncomfortable to decide, but it’s important to go into the loan application process with an honest view of your business’s finances.

Aside from testing out different numbers in our business loan calculator, the next best way to determine this is to figure out your debt-service coverage ratio (DSCR).

What is your debt-service coverage ratio?

Your DSCR is the difference between:

• How much your business earns, and
• How much your business owes

It’s the number lenders will look at first when you apply for a business loan. A higher number is better. (A DSCR over 1 means you’re bringing in more money than you owe.)

How to calculate your DSCR

To calculate your business’s DSCR, you’ll need to do the following math:

• your business’s net operating income / debt obligations for the current year = Your DSCR.
  

Let’s break down the two parts of this equation.

Calculating your net operating income

To find your net operating income you’ll take what your business brings in and subtract everything you spend on running it. In other words, it’s the business’s gross income minus expenses.

Let’s say your new small business brings in $60,000 a year. It spends the following:

• $2,000 a month on wages for its employees
• $1,000 a month on rent
• $700 a month on inventory

That means it has $3,700 a month in operating expenses, or $44,400 a year. $60,000 - $44,400 gives this business a net operating income of $15,600.

Be careful not to include any debts on this calculation! For example, rent would come out of this number, but a mortgage will go toward your debt obligations in the next step. 

This number also shouldn’t include your “tax-only” expenses, like your home office deduction. 

Calculating your debt obligations

That same business also has some debts. In this case, it owes:

• $500 a month for the car loan on their business van
• An average of $250 a month on their business credit card

This gives them a monthly debt obligation on $750, or a yearly obligation of $9,000 ($750 x 12).

Using net operating income and debts to find your DSCR

Now that we have both the numbers we need for this business, we can determine its DSCR!

In this case, the business has $15,600 in net operating income, and $9,000 in debt obligations. Divide them, and you see that its DSCR is 1.73.

• $15,600 / $9,000 = 1.73.

The higher your DSCR, the more profitable your business. In our example above, your business takes in 73% more than it spends. 

What’s a good DSCR if you want a business loan? 

An ideal DSCR will vary from bank to bank, but a good minimum to shoot for is 1.25. That’s because 25% of your net operating income is considered a fairly acceptable amount of debt for a business to take on.

Using your DSCR to determine your potential loan amount

To figure out how much a bank will probably lend you, simply divide your net operating income by 1.25, the minimum DSCR most banks like to see.

In the case of our business, that would give us:

• $15,600  / 1.25 = $12,480

So this business can probably afford a loan somewhere in the range of $12,480.

Note that our example business has a DSCR of 1.73 — more than the recommended 1.25. So they could ask for a larger loan. But to stay profitable, they probably shouldn’t.

What you’ll need to get a business loan

As a borrower, the first thing you’ll need to decide is which lender to apply for a loan with. (To get you started, we’ve compiled a list of the best banks for small businesses.)

Here’s a four-step process to help you increase your odds of getting the right loan for your business.

Step #1. Consider going with your current business bank

Ideally, you’ll start with the bank that you already use for your business. The history you’ve built together will go a long way in helping them assess your business finances.

That’s especially true of small banks, where the people making financial decisions are more likely to know you and understand the community your business serves.

Beyond an established history, though, there are a few things you should put together to make the best case for your loan that you can.

Step #2. Get your documents in order

Each lender will have unique, specific information they’ll look at to determine who they lend money to, but the main factors remain the same. You’re going to want detailed financial statements and documents that demonstrate:

• Proof of identification for your business (like articles of incorporation and tax ID number)
• How long you’ve been in business
• Your business’s profits and losses
• Any current business debt
• The number of employees you have, and how much you spend on payroll
• An updated business plan, showing how you’ll use the loan and what results you expect to see from it
• An understanding of the current market for your type of business
• What sort of collateral you can offer

You’ll also need personal documentation to verify your own income, identity, and housing costs.

Step #3. Polish up your credit score

Before you approach a lender, get a copy of:

• Your personal credit report
• The credit report for your business
• Make sure you get any errors corrected before you head to the bank.

Step #4. Shop around

Even if you’re lucky enough to get approved for a business loan at the very first lender you approach, it will help you negotiate the best deal if you have numbers from other banks to use as leverage.

Ask around, and get interest rate quotes from multiple banks. If you can, try to dig into what kinds of businesses each bank typically funds. Some banks are strongly associated with certain industries, like NP Paribas and Citigroup for retail. 

Can freelancers get a small business loan?

Yes, but it’s more complicated than for other small businesses, requiring great recordkeeping and an excellent credit score.

The biggest reason lenders hesitate to finance freelancers is that there’s no built-in separation between your personal finances and business finances.

Even if you have a separate small business bank account, you’re still personally liable for expenses that your business alone can’t cover. That means banks are really assessing your personal financial security when they decide whether or not to give you a loan.

Since they’re looking at lending you large sums of money, that understandably gives them pause. However, that doesn’t mean you’re out of luck if you need funding to grow your business.

How to get a loan for your business as a freelancer

There are a few things you can do that will improve your odds of getting a business loan as a freelancer.

Keep excellent track of your finances

This will help on two fronts. It: 

• ✓ Demonstrates that you know how much money your business has to spend
• ✓ Helps lenders get a clearer sense of what your business expenses are

If you’re Type A, you probably already have a dozen spreadsheets documenting the path of every penny that passes through your possession. However, for the rest of us, tracking expenses can feel like a daunting task.

Keeper takes the stress out by letting you mix personal and business finances in the same account, and still have the paper trail you’ll need for a loan.

By scanning your transactions and creating downloadable reports, the app makes it easy to put together the profit and loss statements lenders love to see.

Have a stellar credit score

This one’s definitely easier said than done. But the cold truth is a high credit score is much more likely to yield positive results, especially for businesses banks don’t typically like to fund.

It’s still not a guarantee, but freelancers should aim for a credit score in the 700-800 range to secure a business loan. The farther you are from that mark, the less likely a bank is to agree.

Consider alternate methods of funding

If a standard business loan isn’t in the cards, there are other options that freelancers have. These include:

• Microloans
• Personal loans
• Business credit cards
• Business grants
• ‍‍Crowdfunding

It's possible that a funding source other than a traditional bank will be better able to meet your business needs.

Whether you’re a freelancer or a small business owner with employees, getting a business loan can help you take your work to the next level.

It won’t be a fast process, but with the right preparation, solid records, and a strong business plan, you’ll greatly increase your chance of success. Good luck!