Finding the Right Size of SBA Loan for Your Small Business

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By: Alexis Dishman

Is your small business ready for a Small Business Administration (SBA) loan? You may be asking yourself, how much SBA loan can I get? Seeking SBA financing requires careful financial planning and insight into the small business lending process. The SBA offers several different loan programs, each with its own limits, restrictions, and qualifications.

Here are a few steps you can take to determine the right size SBA loan for your small business:

Assess how much money your business needs

It’s important not to borrow more than you can afford to pay back. Most lenders will question your repayment ability if your loan request is too large. You’ll need to provide detailed cost projections for the use of your loan funds and estimate future revenue as well as costs. Doing this will show lenders that you are well-versed in business principles and informed about your own business financials, making it easier for them to determine whether you are qualified to borrow money.

Determine what payments you can afford

This is perhaps the most essential part of finding the right-sized loan for your business. Lenders evaluate how much cash your business has on hand to pay back a loan over a given term – this is called debt service coverage ratio. To calculate it, you’ll need to know your cash flow and the amount of money you’ll have left over to make debt payments. Your debt-to-income ratio – or your monthly income vs. monthly debt – is also a key measure for getting financing.

Determine what the loan will cost you

The loan amount and interest aren’t the only costs of obtaining a small business loan. There are closing costs and potentially fees and percentage points you may have to pay in addition to interest payments. Some of these costs can be rolled into the loan, while others – like closing costs – must be paid when the loan closes. Make sure your lender gives you an accurate accounting of the total cost of the loan.

Figure out how the loan will impact your revenue

This is where the proverbial “rubber meets the road.” How much profit can you expect to make after factoring all your loan’s costs and fees? Can you improve this number if you borrow more? Calculating the impact on revenue is a critical step that will help you understand your ability to leverage financing for profit. Without this assessment, you may end up borrowing too much for the loan to be sustainable based on your profit projections.

Assess whether you will need additional financing in the future

Does your business plan call for further expansion? Capital investments? Real estate acquisition? If so, then you may want to start with a smaller loan amount initially to help build your credit and cash flow before taking out a larger loan. If you borrow too much now, then you may not have the ability to borrow more in the future due to debt-to-income ratios and other calculations lenders make to determine eligibility.

Responsible financial planning is essential when taking on debt for your business. It’s important for small business owners to be realistic about repayment ability. Owners must also consider the impact of loan payments on cash flow. We recommend connecting with financial advisors and business experts through your financial institution (mission-based Community Development Financial Institutions, or CDFIs, are a good place to start) to ensure that your loan is “right-sized” for your business, its needs, and its financial capacity.

Ready to discuss SBA loans with a small business support organization? Complete the small business application form and get started today!

Disclaimer: the information provided on this page is meant for general informational purposes only and may not reflect the most current resources and recommendations available. Please consult with your financial, tax, legal, and other relevant advisors when making decisions about your small business. 

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