The business loan lending criteria calculator can be used when applying for business loans. The calculator estimates the maximum amount a lender is willing to lend based on 3 lending criteria.
- Security
- Ability to repay
- Borrowers equity
Lending criteria are the set of guidelines or requirements that a lender uses to evaluate the creditworthiness of a potential borrower and determine their eligibility for a business loan. These criteria can vary depending on the type of loan and the lender, but some common factors that lenders consider when assessing a borrower’s creditworthiness.
Business Loan Lending Criteria Calculator Instructions
1. Security
A lender will normally lend 1:1 against available security value. 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 lending criteria calculator example, the market value of the assets (in this case stock, debtors, and fixed assets) is 140,000. However 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. An indicator of this is how much cash you have available to make the monthly repayments. A good estimate of cash flow can be obtained using your profit before tax and adding back interest and depreciation. The revised profit figure is usually referred to as EBITDA. The lender will then require a certain debt service cover in its calculations.
In the business loan lending criteria calculator example, the cash flow is 16,000 and the lender requires cover of 2.5. Consequently the cash flow must be at least 2.5 times the loan repayments. 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 lending criteria calculator example the lender has a maximum ratio of 60%. Consequently 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 Lending Criteria Calculator Download
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.
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.