If you’re in the market for a small business loan, you’re preparing for a fair bit of paperwork and time spent working with the lender to hopefully get approved. A survey by Nav showed that small business owners spent 33 hours applying for credit with an average of three applications filed with three institutions. Before going into such a time-consuming process, you need to know what you’re getting yourself into. Start by checking your business credit score (you can do so for free with Nav), and see where you stand before beginning the application process.
Any lender will want peace of mind knowing that their borrower is capable of repaying the loan, but how much revenue do you need to get a business loan? As you might expect, the answer is “it depends.” Here’s some insight.
A Hard Number
You’re here for a hard number. While every lender and every loan will be different, there are some general figures that can give you a guiding hand. A good amount of lenders may only require $10,000/month in revenue to consider approving the loan. Many, however, could require around $30,000/month and higher. Again, every situation is unique, and these are very general figures
Debt-Service Coverage Ratio
Because requirements will likely vary from loan to loan due a variety of changing factors, it’s important know what requirements your lender might be looking at. One key factor dealing with your revenue is Debt-Service Coverage Ratio (DSCR). Your DSCR can be measured, generally, as Net Operating Income/Total Debt Service; or, essentially, the amount of money you receive for every dollar you spend. Revenue is important, but how you get your revenue is equally important to your lender.
This is an added requirement to business loans, whereas personal loans may only examine your Debt-to-Income (DTI) ratio. This can simply be calculated as Monthly Debt Payments/Monthly Income. If your monthly payments are $4,000 and your business income is $10,000, your DTI will be 40%. Business loans very well may also examine your business’ DTI ratio, an important product that depends on your business’ revenue. Lenders generally require a DTI ratio from 40%-50%, though there are always exceptions.
Frequency of Payments
Just as important as knowing the gross total of your revenue, debt, and the related ratios, your lender will also want to know the frequency of payments of both. Having $30,000/month in gross revenue is great, but how are you receiving that? Receiving ten payments of $3,000 is likely far better than receiving one payment of $30,000 in the eyes of your lender.
Additionally, knowing how many credit lines you have on your credit report, or how many different vendors or debtors you’re paying each month is important. By expanding your portfolio of clients and getting more income from more people each month, your profile will likely stand out better than otherwise.
In any situation dealing with credit, taking a more holistic approach will pay off for you. Bringing in a higher amount of revenue each month is great, and it’s better if it’s coming from more people. A lower amount of debt will always reflect well in front of a lender. By using the best business practices possible and building a strong profile, you’ll increase your odds of obtaining favorable financing.