Calculate if Your Business Can Afford a Loan

by Craig Anthony

1 min read

A business loan can be just what your business needs to expand, or it can completely cripple your operation. If you feel that a loan can help your business going forward, the next step is determining how much of a loan your business can afford. You can calculate whether your business can afford a loan the same way a lender would, by determining your business’ debt service coverage ratio, or DSCR. While there are two more complex formulas you can use to calculate your business’ DSCR, the simplest way is to subtract how much your business spends every month from its income. Then, divide that amount by the amount of the loan payment. If the result is 1 or higher, your business can afford the loan. For example, if your business makes $5,00 per month and spends $3,000, then it has a cash flow of $2,000 per month. With a proposed loan payment of $1,000 per month, your business has a DSCR of 2, or $2,000 divided by $1,000. This puts you in a safe position to take out that loan. While 1 is the minimum DSCR for your business to afford a loan, that puts you close to the edge, so higher is always better. If your business’ DSCR is at 1, any loss of income would put you in the negative. It’s best to avoid taking out loans whenever possible, since interest can cost you hundreds or even thousands depending on the terms of your loan. There are times when a business loan can be a wise choice to improve your business’ performance, as long as you’re making enough to cover the payments.

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