# Business Loan Calculator – Lending Criteria

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. ### 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.