Lenders evaluate loan requests using a combination of cash flow coverage, collateral, and revenue benchmarks. Understanding these formulas helps you walk into a loan application with a realistic ask.
The DSCR method (most important)
Lenders start with your ability to repay. The core ratio is:
DSCR = Annual NOI / Annual Debt Service ≥ 1.25
Annual NOI = Net income + depreciation + amortization + interest (before new loan).
Working backwards: if your annual NOI is $100,000 and lender requires DSCR 1.25: Maximum annual debt service = $100,000 / 1.25 = $80,000 Maximum monthly payment = $80,000 / 12 = $6,667
With a $6,667 monthly max at 8.5% APR over 84 months: Maximum loan = ~$423,000 (per the amortization formula)
This is the most reliable method for estimating maximum loan size.
Revenue multiples (quick estimate)
Lenders often use annual revenue as a quick sanity check:
| Loan type | Typical maximum |
|---|---|
| Working capital loan | 8–15% of annual revenue |
| Equipment loan | Up to equipment value |
| SBA 7(a) | Up to $5M, limited by DSCR |
| Business line of credit | 10–25% of annual revenue |
For a $2M/year business: working capital loan up to $200–300k. Line of credit up to $200–500k.
Collateral coverage
Collateral reduces lender risk and may allow higher loan amounts:
Accounts receivable: Lenders lend 70–85% of eligible AR (invoices <90 days). Equipment: 50–80% of appraised value. Real estate: 70–80% LTV. Inventory: 25–50% of appraised value.
Note: collateral is a secondary factor for most lenders. DSCR coverage is primary. Don't over-borrow just because you have collateral.
What lenders look at beyond the numbers
Industry risk: Restaurants, retail, and seasonal businesses face stricter scrutiny. SaaS and professional services typically get better terms.
Business age: Under 2 years limits options significantly. Plan to wait or use alternative funding (revenue-based financing, angel investment).
Owner credit: Your personal FICO score heavily influences rate and approval. A 700+ score typically unlocks the best terms; 650–699 is workable; below 650 limits you to SBA or alternative lenders.
Use the Business Loan Calculator to back into a loan size from your maximum affordable monthly payment.