How Much Can You Borrow?
Taking on too much debt can cripple a business. Determining loan affordability means understanding your debt capacity, cash flow, and ability to make payments even during slow periods. Borrow the right amount, not the maximum a lender offers.
Key Affordability Metrics
Debt Service Coverage Ratio (DSCR): Net Operating Income / Debt Payments. Should be 1.25+ for safety. Debt-to-Equity Ratio: Total Debt / Total Equity. Compare to industry norms. Cash Flow: Can you afford payments after operating expenses? Payment-to-Revenue Ratio: Shouldn't exceed 10-15% of revenue.
Planning for Uncertainty
Plan for seasonal fluctuations. Build 3-6 months payment reserve. Consider worst-case scenarios. Factor in potential rate increases for variable loans. Don't assume best-case revenue projections. Remember that debt must be paid regardless of business performance.
Warning Signs of Over-Borrowing
Struggling to make current payments. Using loans to cover operating expenses. Declining profit margins. Delayed payments to vendors. No cash reserves. If these apply, borrowing more is not the solution - address underlying issues first.
Key Takeaways
Don't borrow the maximum offered. Maintain DSCR above 1.25. Plan for seasonal fluctuations. Keep 3-6 months payment reserve. Borrow for growth, not survival. Use our Business Loan Affordability Calculator to find your sweet spot.