How Large of a Business Loan Can You Get?
How much of a business loan you can get is primarily a function of your business’s annual gross sales, existing debt, and creditworthiness. Most lenders won’t lend more than 10% to 30% of a business’s annual revenue. Your company should be cash flow positive after accounting for all debt payments.
Every small business owner knows that running and growing your business takes a lot of capital. But when the time comes for getting a small business loan, how much money will a lender actually loan your business?
Exact loan amounts differ based on lender, loan type, and borrower. Every loan agreement is unique in that way. But, there are some general rules of thumb. We’ll tell you generally how much a lender will loan you for your business financing, plus what to expect from the loan application process. Armed with this information, you can make sure that you’re able to secure sufficient capital for your business needs.
How Much Will a Lender Loan My Small Business?
There are many types of loans that are available to small businesses. Depending on a variety of factors, such as your credit and how quickly you need capital, you can seek out a bank loan, SBA loan, or online short-term loan for your business. These loan classes carry different maximum loan amounts.
Broken down by loan category, here’s how much money you can get with a business loan:
Short-Term Online Loans: $5,000 to $500,000
Many small business owners get capital through short-term business loans. The repayment term on these loans is generally one or two years, making them a good option for buying inventory or supplies or for other short-term needs. The primary benefit of these loans is that they are a quick way to get capital, getting money into your hands within just a couple business days. These loans are also more flexible in terms of credit standards, so a wider range of business owners can qualify.
Short-term lenders will typically loan your business no more than 10% to 15% of your company’s annual gross sales. Of course, to receive any capital, you need to meet the lender’s basic qualification requirements. Most short-term lenders require that your company be operating for at least one year and have at least $50,000 in annual revenue. The owner should have also a personal credit score of at least 550.
Medium-Term Online Loans: $5,000 to $500,000
Another option for business financing is with medium-term online loans. Medium-term loans also have a relatively fast turnaround times, and have repayment terms of three to five years. They are less expensive than short-term loans and require slightly higher creditworthiness.
Medium-term lenders will typically loan your business no more than 20% to 30% of your company’s annual gross sales. They offer more capital than short-term lenders because the customer base is usually more creditworthy and in a stronger financial position to pay back the loan. Since they have more stringent credit standards, they can afford to entrust businesses with more money. To qualify for a medium-term loan, you generally need a 600 personal credit score, one to two years in business, and more than $50,000 in annual revenue.
Bank Term Loans: $5,000+
A bank has traditionally been the place to go for a business term loan. Like other term loans, bank term loans deposit a lump sum of cash directly into your bank account. You’ll repay that amount, plus interest, over a fixed period of time. Bank term loans tend to be for larger dollar amounts than online loans, making them ideal for small business owners who need to finance big, one-time projects, like renovations and large inventory orders.
What’s not so cut-and-dry about term loans, though, is how much a bank will lend to a small business. That amount varies from bank to bank, and from borrower to borrower.The biggest commercial banks can offer capital amounts into the millions for the most eligible borrowers: Think 700+ credit scores, many years of profitability, and airtight business plans. Interest rates will be among the lowest you’ll find on the market.
Banks tends to rely on a number called debt service coverage ratio (DSCR). DSCR is equal to your business’s annual net operating income divided by your annual debt payments. Most banks require a DSCR of at least 1.1, which means your annual revenue exceeds your debt payments by 110%. Banks will limit your loan amount, so that your DSCR doesn’t exceed 1.1 (or whatever their minimum is). Some banks use a global debt service coverage ratio (DSCR), which includes personal sources of income and debt in addition to business income and debt.
Depending on why you want the loan, you might also have to provide a down payment. For example, a term loan to buy a building or to acquire an existing business usually requires a 20% down payment. Business owners should ensure that they can come to the table with this money before applying for the loan.
Bank Lines of Credit: $5,000+
Traditional term loans different from business lines of credit, because they’re not a lump sum you get in your account all at once. With a business line of credit, your bank gives you access to a specific amount of cash, which you can pull down from whenever you want and use to cover whatever expenses you need. You’ll only pay interest on the funds you use.
Business lines of credit are an excellent option for small businesses facing continual cash-flow issues. And, since you’re getting fast access to flexible cash, business lines of credit give you peace of mind in case you need to tend to any unforeseen expenses—whether that’s an emergency like a burst pipe, or an opportunity that you want to capitalize on right away.
Banks use DSCR with business lines of credit as well, but it’s less helpful here because a business might or might not draw on all of the available funds. Banks will also consider your credit score, business revenue, collateral (for a secured business line of credit), and projected financials for your business. Business lines of credit from banks range from as little as $5,000 to as much as $1 million or more.
SBA Loans: Up to $5 million
If you do any research into small business loans, SBA loans will probably figure front and center. The U.S. Small Business Administration, an independent government agency, helps small businesses by guaranteeing SBA loans issued by banks.
The SBA partners with lenders (most of which are banks) across the country, and the agency guarantees the loan with federal money up to 85%. That guaranteed safety net incentivizes lenders to extend these loans to small business owners. SBA loans offer low interests, long repayment terms, and manageable monthly payments.
Out of the different SBA loan programs that are available through your bank, the SBA 7(a) loan is by far the most popular. This loan program offers up to $5 million to suit a variety of needs, like refinancing debt, providing working capital, and covering inventory expenses. To qualify for the 7(a) loan, you need to satisfy SBA rules and any requirements that the bank has.
Your DSCR will play a big role in how large of an SBA loan you can get. In most cases, lenders require a DSCR of 1.15 or higher for SBA loans and a global DSCR of 1.25 or higher. SBA loans almost always require collateral, a personal guarantee, and strong personal credit. The most common types of SBA loans require at least a 10% SBA down payment, particularly from startups and for business acquisitions.
Business Credit Cards: Up to $100,000
Most people don’t think of business credit cards as loans, but they belong in the same category. Business credit cards are similar to lines of credit. You get access to a specific amount of capital that you can draw on as needed. Then, you pay back at least a minimum balance each month. Business credit cards are very convenient, and sometimes the only available type of financing for startups.
Credit card issuers look at a variety of variables in determining your credit limit, including your business and personal income, credit history, and credit limit on other credit cards and loans. They also look at a number called debt-to-income ratio (DTI), which is similar to DSCR. DTI is all of your monthly debt payments divided by your monthly gross income. Unlike DSCR, which is usually calculated on an annual basis, credit card issuers calculate DTI on a monthly basis because you make monthly credit card payments. Your DTI should ideally be below 43%.
There are a number of high-limit business credit cards, such as the Chase Ink Business Preferred below, but most top out at a $100,000 credit limit.
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How Do Lenders Determine Loan Amounts?
Across the board, lenders issue the highest loan amounts to the borrowers they deem the most eligible—essentially, the borrowers who they think will be able to repay these large debts in full and on time. All lenders want to be sure that they’re working with responsible borrowers, so they don’t lose their money.
Thanks to collateral, banks aren’t left completely out to dry if a borrower doesn’t repay their loan. Collateral is any asset—like cars, equipment, real estate, accounts receivable, or cash—that the borrower puts up for the lender to seize in case the borrower defaults on their loan. In that case, the lender will collect and liquidate those assets to recoup as much of the missing debt as possible. Other types of collateral include blanket liens, which allows the lender to seize any kind of asset that the borrower owns, both tangible and intangible; and personal guarantees.
Although online loans usually don’t require collateral, most require a personal guarantee. That’s a promise to pay the loan back out of your personal assets if the business is unable to pay for any reason.
Lenders try to mitigate risk at every turn. But how, exactly, do banks determine if a borrower is reliable enough to handle the highest loan amounts? They’ll consider all aspects of a potential borrower’s business loan application to figure that out.
Business Loan Application
Depending on the lending institution and the type of loan you’re going for, your business loan application might include:
- Business loan request letter
- Bank statements
- Personal and business tax returns
- Profit & loss statements
- Balance sheets
- Your personal income
- Personal credit score
- Business credit score
- Annual revenue
- Time in business
- Business plan
- Industry type
Lenders fall along a spectrum in terms of how much information they require from business loan applicants. Many online short-term lenders just ask for business bank account statements. Banks ask for all of the information above. The banks use this information to determine your DSCR, personal creditworthiness, profitability, and more. All these stats give the lender a holistic profile of your business’s financial stability, and how well you’ll be able to handle additional debt. In turn, this will determine how much a bank will loan you for a business.
Be aware that most banks are hesitant to hand out loans to very young businesses, so if your company is fewer than two years old, you might want to seek a loan from an alternative lender. Most banks prefer borrowers with high credit scores, so same goes if your credit score is below 650. Your industry type is more important than you might think, too. Unfortunately, banks are reluctant to lend to businesses in high-risk industries, like bars and restaurants.
Even if you meet the minimum qualification standards for a lender, keep in mind that just crossing the line might not get you the highest loan amounts possible, and the lowest interest rates. For that, your bank wants to see stellar personal credit scores, several years’ worth of profitability, and that your business has a clean financial history.
How to Maximize Your Business Loan
Ultimately, when you’re asking, How much of a business loan can I get?, you’ll quickly find out that the small business loan underwriting process isn’t formulaic. Every lender will determine your eligibility for a loan on an individual basis. The terms of the loan—including the interest rates, repayment periods, and required collateral—also depend on the type of loan and the borrower’s application.
You’ll need a strong application for a bank to approve you for a loan. And only the strongest of those approved candidates will be eligible for the highest loan amounts.
So, if your bank doesn’t approve your loan application this time around, know that you’re in the majority. Actually, about 80% of small business owners who apply for bank loans get rejected. Luckily for that huge majority, small business loan options don’t stop at the bank’s locked door.
Short-term loans and medium-term loans from alternative online lenders typically have less rigorous eligibility requirements than bank loans do. Also, it’s always a good idea to use a business credit card. You’ll build up your credit history, earn rewards that can help you run your business, and pay for everyday expenses.
These small business financing methods will help you grow every aspect of your business—which is exactly what banks want to see on your application. Next time you approach your lender for a loan, you just might walk away with the amount you were hoping for.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.