Debt Service Coverage Decides the Application
Consumer lending is underwritten on credit score and debt-to-income. Commercial lending is underwritten on whether the business generates enough cash to service the loan:
DSCR = Net operating income / Annual debt service
Most lenders require at least 1.25 — $1.25 of income for every $1 of payments. Below 1.15 the application is generally declined; above 1.50 the file is strong. A borrower with excellent personal credit and a 1.05 ratio will usually be turned down, because the business itself does not support the debt.
SBA Loans
The Small Business Administration does not lend; it guarantees a portion of a bank's loan, reducing the bank's risk and widening who qualifies.
| Program | Maximum | Typical use |
|---|---|---|
| SBA 7(a) | $5 million | Working capital, acquisition, refinancing |
| SBA 504 | $5.5 million | Real estate and heavy equipment |
| SBA Microloan | $50,000 | Startup and small working capital |
| SBA Express | $500,000 | Faster approval, smaller guarantee |
Rates are capped relative to prime, but a guarantee fee of 0.25–3.75% applies, along with packaging and closing costs. SBA loans are cheaper than the alternatives and slower to obtain — 30 to 90 days is normal.
The Costs Beyond the Rate
- Origination and packaging fees — 1–5%, often financed.
- Personal guarantee — standard on almost all small business lending, which puts personal assets behind the debt regardless of the corporate structure.
- Blanket lien on business assets, restricting future borrowing.
- Covenants — minimum coverage ratios or maximum leverage, breach of which can call the loan.
Beware the Factor Rate
Merchant cash advances and some online lenders quote a factor rate rather than an interest rate: borrow $50,000 at a factor of 1.35 and repay $67,500. That sounds like 35%. Repaid over nine months through daily debits, the effective APR is closer to 90%. Any offer quoted as a factor rate rather than an APR should be converted before it is compared with anything.
Frequently Asked Questions
How much can my business borrow?
Roughly what a 1.25 coverage ratio supports. Divide net operating income by 1.25, subtract existing debt payments, and the remainder is the annual payment a lender will underwrite.
Do I need collateral?
Usually, for loans above about $25,000 — business assets, real estate, or a personal guarantee. Unsecured business lending exists at materially higher rates.
What is net operating income?
Revenue minus operating expenses, before interest, tax, depreciation and amortisation, and before the owner's discretionary compensation in most lender calculations.