How Much Money Can I Get
Through a Business Loan?
This is one of the most often
questions by entrepreneurs that are either starting business or expanding
existing businesses. Primarily, the amount of money you can ultimately borrow
when looking for business loan is dependent on your credit and the amount of
collateral you can use to secure the business loan. Foremost is the collateral
when it comes to business loan lending. This is because banks and finance
companies want a sure fire way of ensuring that they can recoup their investment
in the event that you default on the loan. This is very similar to the concept
of a mortgage where if you stop making payments then the bank will foreclose on
the property. In regards to the collateral, and very much like a mortgage, the
proceeds of the business loan (assuming you are purchasing tangible property
such as real estate or equipment) can be used as the collateral itself.
A good rule of thumb is that a
bank or finance company is willing to provide you with 75% of the capital that
you need for your project assuming that you are primarily using the business
loan funds for the acquisition of tangible equipment or property. If you are
seeking a business loan for working capital purposes or general expansion
purposes then the loan is going to need to be secured by a strong credit rating
plus collateral that you may already own including your home and business
assets.
Additionally, you must factor
in the amount of positive cash flow that your business is currently producing or
is expecting to produce. Most financial institutions want to see that the debt
service of the loan is equal to no more than 60% of your pre-tax income.
However, this is not a steadfast rule especially if the proceeds of the business
loan are primarily geared towards real estate purposes.