How much business can you afford?

Knowing how much business you can afford with an SBA loan is essential to making the right purchase.

The amount you can borrow will depend on several factors, including your down payment, business cash flow, and overall financial health.

Here’s a bird's eye view breakdown on figuring out your buying power.

Calculate Your Down Payment

SBA loans typically require a 10% to 20% down payment. For example:

• If you’re looking at a business priced at $500,000, you’ll need between $50,000 and $100,000 upfront.
• The larger your down payment, the more likely you are to be approved, as it shows your financial commitment.

Determine Your Debt Service Coverage Ratio (DSCR)

The DSCR is a key factor lenders use to assess how much debt your business can handle. A DSCR of 1.25 or higher is usually required. This means your business’s cash flow needs to be 1.25 times greater than the loan payments.

• Example: If your annual loan payments will be $50,000, your business needs to generate at least $62,500 in cash flow ($50,000 × 1.25) to meet this requirement.

Estimate Your Monthly Payments

To calculate how much your loan payments will be, consider these factors:

• Loan amount: The total amount borrowed.
• Interest rate: SBA loans typically carry an interest rate of Prime + 2.25% to 4.75%.
• Loan term: The loan’s repayment period, which could range from 10 to 25 years.

Use an online SBA loan calculator to plug in these variables and estimate your monthly payment. Make sure the payment aligns with your business’s cash flow projections.

Review the Business’s Financials

The business’s current financial health plays a major role in how much you can afford. Analyze key metrics like revenue, expenses, and cash flow to understand whether the business can support the loan payments and still generate profit.

To close out, understanding how much business you can afford with an SBA loan is key to making a smart purchase.

By calculating your down payment, DSCR, and monthly payments, you can confidently evaluate businesses within your budget.

And of course you want to work with your broker and lender to ensure your financial projections are solid, and soon enough, you'll be on your way to buying a business that makes sense for you financially.

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