If you’re a business owner wondering how much financing you could qualify for, you’re not alone. With formulas and acronyms flying around a lender’s office, it can seem like they pull your loan amount out of thin air.
The answer isn’t one-size-fits-all. However, understanding how lenders think about your financials and the variables lenders use can take the mystery out of your business loan qualification process and help you understand how much financing you could get.
Understand Lender Mindsets
Diving into the numbers and formulas lenders use to calculate your loan amount can be confusing if you don’t understand how lenders think. They’re calculating risk. Lending you money is an investment for their business. The more confidence a lender has in your ability to repay, the more willing they are to approve a large loan.
Lenders rely on data to determine risk. Your loan size largely hinges on foundational metrics, including your annual revenue, net cash flow, existing debts, and business age. Different types of loans prioritize different information. Revenue-based financing loan, for example, relies more on your recent top-line revenue trends, while a term loan or SBA loan focuses on your balance sheet and credit history.
No matter the small business financing you’re pursuing or the loan amount, having a strong grasp of your financials allows you to see your application from the lender’s perspective.
Annual Revenue
Your business’s annual revenue is the first benchmark lenders will use to evaluate your maximum loan amount. Between 10% and 20% of your annual sales will be the cap on what a lender offers. If you generate $500,000 a year, your initial loan offer would fall somewhere in the $50,000 to $100,000 range.
It’s not just about how much money you bring in, though. It’s about consistency, growth, and trends over time. Lenders like predictability. They might offer lower loan amounts, shorter terms, or stricter repayment methods if your revenue fluctuates wildly. Lenders may be more flexible and confident in offering larger amounts if your revenue is consistent month-to-month, like SaaS companies or subscription box models.
Cash Flow
Revenue gets attention, but cash flow shows how much money you have left after expenses. Even a high-revenue business struggles to qualify for a large loan if its cash flow is thin. Lenders want to ensure you can handle repayments without suffocating your operations.
To assess your cash flow, lenders may look at your net profit, earnings before interest, taxes, depreciation, and amortization (EBITDA), or a simplified debt service coverage ratio (DSCR). A healthy DSCR is above 1.25, meaning you generate at least $1.25 in cash for every $1.00 loan repayment.
Say your restaurant earns $20,000 monthly and spends $17,000, leaving you with $3,000 in net profit. If your monthly loan payment is $2,000, that’s a DSCR of 1.5—comfortably above the standard threshold. Lenders view this as a green light to extend more financing.
Existing Debt and Obligations
Lenders will assess your current debt load to avoid overextending your business. The more debt you already carry, the more cautious lenders become. Obligations include credit lines, business credit cards, equipment financing, and other term loans.
Suppose your restaurant already repays a $48,000 loan with $2,000 monthly payments. While that monthly amount is a healthy DSCR, it does limit the potential for an additional loan. Your new monthly payment would decrease your net profit and your DSCR. In that case, lenders reduce the amount they’re willing to offer, shorten the repayment period, or require a stronger repayment history before approving additional capital.
Consolidating or refinancing existing debt can improve your eligibility. By reducing the number of creditors or securing better terms, you lower your repayment costs, improve your cash flow, and boost your ability to get a business loan.
Business Age
Lenders prefer working with businesses that have a proven track record. A longer operating history means more data to analyze and confidence in your ability to weather market ups and downs. Most lenders require clients to have at least six to 12 months in business, with more favorable terms for those operating for two or more years.
Younger businesses still qualify, usually with smaller loan sizes, higher interest rates, or tighter repayment terms until you build more history. If you’re newer to the lending landscape, position your business as organized, growth-oriented, and financially disciplined to appear less risky to your lenders.
If two businesses have similar revenues today, a lender is more likely to bet on a business that has been profitable for two years over one that is just getting started.
The Best Position Possible
Present your business in the strongest light to improve your odds and access the best terms. Keep your financial records up-to-date, build a healthy cash reserve, and reduce unnecessary debt. A clean, confident application with clear financials may not be a magic wand, but it shows lenders that you are a serious and responsible borrower.
