Business Loan Eligibility Calculator
A Business Loan Eligibility Calculator is an essential tool for determining whether a business qualifies for a loan and can afford to repay it.
By inputting key financial data such as annual revenue, net income, current debt, business age, credit score, requested loan amount, loan term, and annual interest rate, this calculator provides insights into a business's financial health and loan repayment ability.
The calculator outputs critical metrics such as the Debt-to-Income Ratio, Debt Service Coverage Ratio (DSCR), Loan Affordability, Monthly Loan Payment, Total Loan Payments, and Total Interest Paid.
Formulas:
Debt-to-Income Ratio: Debt-to-Income Ratio = Current Debt / Annual Revenue
Debt Service Coverage Ratio (DSCR): DSCR = Net Income / (Monthly Loan Payment * 12)
Loan Affordability: Loan Affordability = (Net Income - (Monthly Loan Payment * 12)) >= 0
Monthly Loan Payment: Monthly Loan Payment = (Loan Amount * (Monthly Interest Rate / (1 - (1 + Monthly Interest Rate)^(-Total Number of Payments))))
Where:
Monthly Interest Rate = Annual Interest Rate / 12 / 100
Total Number of Payments = Loan Term (Years) * 12
Total Loan Payments: Total Loan Payments = Monthly Loan Payment * Total Number of Payments
Total Interest Paid: Total Interest Paid = Total Loan Payments - Loan Amount
Step-by-Step Guide with Real-Life Example:
Example Scenario: Let's assume a business has the following financials:
Annual Revenue: $500,000
Net Income: $100,000
Current Debt: $50,000
Business Age: 5 years
Credit Score: 720
Requested Loan Amount: $100,000
Loan Term: 5 years
Annual Interest Rate: 6%
Step 1: Calculate Debt-to-Income Ratio
Debt-to-Income Ratio = 50,000 / 500,000 = 0.1 or 10%
Step 2: Calculate Monthly Interest Rate
Monthly Interest Rate = 6 / 12 / 100 = 0.005
Step 3: Calculate Total Number of Payments
Total Number of Payments = 5 * 12 = 60
Step 4: Calculate Monthly Loan Payment
Monthly Loan Payment = 100,000 * (0.005 / (1 - (1 + 0.005)^(-60))) = $1,933.28
Step 5: Calculate DSCR
DSCR = 100,000 / (1,933.28 * 12) = 100,000 / 23,199.36 ≈ 4.31
Step 6: Calculate Loan Affordability
Loan Affordability = 100,000 - (1,933.28 * 12) = 100,000 - 23,199.36 = $76,800.64 ≥ 0 (The loan is affordable.)
Step 7: Calculate Total Loan Payments
Total Loan Payments = 1,933.28 * 60 = $115,996.80
Step 8: Calculate Total Interest Paid
Total Interest Paid = 115,996.80 - 100,000 = $15,996.80
Facts:
Debt-to-Income Ratio: Lenders prefer a lower Debt-to-Income Ratio, usually below 40%.
DSCR: A DSCR of 1 or higher is considered acceptable, indicating the business can cover its debt obligations.
Loan Affordability: Determines whether the business can comfortably repay the loan without financial strain.
FAQ:
What is a good Debt-to-Income Ratio for a business?
A Debt-to-Income Ratio below 40% is generally considered good, indicating that the business has a manageable level of debt relative to its income.
What does DSCR mean for loan eligibility?
DSCR measures the ability of a business to cover its debt obligations with its net income. A DSCR of 1 or higher is usually required for loan approval.
How do lenders use the Loan Affordability metric?
Loan Affordability helps lenders assess whether the business can comfortably afford the monthly loan payments without risking financial distress.
What if my Total Interest Paid is high?
A higher Total Interest Paid indicates that the cost of borrowing is significant. It’s advisable to explore options for a lower interest rate or a shorter loan term to reduce interest costs.
Can I improve my business’s loan eligibility?
Yes, by increasing your net income, reducing current debt, improving your credit score, or adjusting the requested loan amount or term, you can improve your loan eligibility.