October 19, 2021
9 Factors That Determine Your Approved Business Loan Amount
Depending on the business lender and loan type, you may be able to borrow anywhere from $1,000 to over $5 million. The ideal business loan amount depends on your unique business, goals, and finances. To make it easier for you to choose the right small business loan amount, we’ve compiled this handy guide.
What is the Average Business Loan Amount?
The business loan amount average is $633,000, according to the most recent data from the Federal Reserve. Since there are countless business lenders and loan programs out there, this figure isn’t necessarily useful. The average small business loan amount for a Small Business Administration (SBA) 7 (a) loan, for example, is likely very different from the average loan amount that you'll get if you apply through an alternative lender or large national bank. In addition, the type of loan you apply for may affect the amount you're approved for; term loans, business lines of credit, and merchant cash advances all typically have varying amount guidelines. Therefore, it makes sense to look past the average loan amount and consider your specific situation.9 Factors to Determine the Right Business Loan Amount
Every small business owner has different financing needs, so it's important to examine your financial situation. To figure out the ideal small business loan amount for your business, think about the following factors:1. How You Plan to Use the Loan Funds
Ask yourself what you’ll use the proceeds for; if you want to buy commercial property, you’ll likely need to borrow more money than if your goal is to cover marketing or inventory costs. Once you determine the purpose of your loan, conduct research to discover how much it will cost you to buy that property, pay for marketing or inventory, afford payroll, or afford your other goals. It's important that you take out a loan amount that covers your costs, while also ensuring that you can pay off your loan amount on-time.2. Loan Profitability
Loan profitability refers to the total revenue you earn from the use of the business loan. Ideally, your revenue will surpass the total costs of the loan. It’s wise to choose the smallest loan amount from which you can generate a profit. Unless you can use them to earn more money, taking out a larger loan amount probably isn't worthwhile.3. Loan Timing
In some cases, you may need the money right away; other times, you can wait weeks or even months for it. Often, business owners have immediate funding needs that require them to start the application process immediately. Due to this, they want to avoid lengthy approval processes, which often come with bank loans. If you decide you have an immediate funding need, you probably won’t be able to take out a large loan amount. In most cases, higher loan amounts come with a lengthier loan application process and longer approval period. However, this isn't always the case, so be sure to ask your lender about their loan ranges before you apply.4. The Cost of the Loan
You’ll have to pay interest on the loan you receive. After a lender provides you with an interest rate for your loan, do the math. Calculate how much it will cost you to borrow your preferred loan amount. Don’t forget to include any fees, as these can raise the cost significantly. If you find that the cost of borrowing is too high, you may want a lower business loan amount that you can comfortably afford to repay.5. Your Budget And Cash Flow Projections
Take a close look at your monthly budget. If you don’t have a lot of money left over to cover loan payments, you’ll probably be better off taking out a smaller loan amount. Otherwise, you may overextend yourself and steer into a cycle of debt. Remember, it’s better to borrow too little than too much, and note that lenders usually prefer borrowers’ debt makes up no more than 36% of their monthly income.