Business Loan Calculator – Lending Criteria

Business Loan Calculator

The Business Loan Calculator can be used when applying for business loans to estimate the maximum amount a lender is willing to lend based on 3 criteria.

business loan calculator

1. Security

A lender will normally lend 1:1 against available security. The lender will apply a discount percentage to each security offered, and the total discounted value must be at least equal to the amount of the loan. In the business loan calculator example, the market value of the assets (in this case stock, debtors, and fixed assets) is 140,000, but due to the discount % applied by the lender, the security value and therefore the maximum loan is only 67,000.

2. Ability to repay

The amount of the loan will be limited by your ability to repay, i.e how much cash do you have available to make the monthly repayments. A good estimate of cash flow can be obtained by taking your accounts profit before tax and adding back interest and depreciation to arrive at a revised profit figure, usually referred to as EBITDA. The lender will then require a certain debt service cover in its calculations. In the business lona calculator example, the cash flow is 16,000 and the lender requires cover of 2.5 (i.e. the cash flow must be at least 2.5 times the loan repayments). So in this case the amount available for loan repayments is a maximum of 6,400, and on a loan repaid monthly with an interest rate of 6% and a term of 5 years, the maximum loan would be 27,600. The loan calculation uses the Excel Present Value function (PV) and is done for you in the download sheet

3. Equity or Net Worth

A lender will have a maximum allowed Gearing ratio which it will use in it’s calculations. The Gearing ratio is calculated as the ratio of Debt/Equity. In the business loan calculator example the lender has a maximum ratio of 60% meaning the debt must not be greater than 60% of the equity. Based on the Equity of the business taken from the accounts, the maximum loan in this case is 60% of 50,000 = 30,000.

Looking at these three limitations, the lender is likely to see the ability to repay as the limiting factor and restrict the maximum loan to 27,600.

Business Loan Calculator

The spreadsheet available for download below will allow you to carry out your own calculations.

Obviously having determined the maximum amount of loan, the lender will take into consideration other factors such as your credit history and the economy etc.

Last modified July 16th, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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