How do I know if I can afford a business loan?

DSCR: The Lender's Affordability Test

Debt Service Coverage Ratio (DSCR) is the primary metric lenders use to determine whether a business can afford a loan. The formula is: DSCR = Net Operating Income ÷ Total Annual Debt Service. Net Operating Income (NOI) is the business's earnings before interest and taxes (EBIT) — essentially, gross revenue minus cost of goods sold minus operating expenses, before debt payments and tax. Total Annual Debt Service is the sum of all annual principal and interest payments on all business debt — existing obligations plus the new proposed loan. A DSCR of 1.25 means the business generates $1.25 of cash flow for every $1.00 of debt service — a 25% cushion. Most conventional bank lenders and SBA preferred lenders require a minimum DSCR of 1.15–1.25. A DSCR below 1.0 means the business cannot cover its debt payments from operating income — the loan is structurally unaffordable and will likely default. According to SBA SOP 50 10, SBA preferred lenders must document that the proposed loan meets the minimum DSCR threshold as part of credit analysis — a file with DSCR below 1.15 requires additional justification or denial.

Cash Flow Perspective: The Monthly Payment Test

DSCR is an annual calculation that works well for bank underwriting but can obscure monthly cash flow pressure. The practical affordability test is: Does the new monthly loan payment fit within your gross-margin headroom after covering all operating expenses? The rule of thumb used by experienced underwriters is the 10–15% rule: total debt service (all monthly loan payments combined) should not exceed 10–15% of gross monthly revenue. Above 15%, the business is operating with very thin margin for unexpected expenses, seasonal dips, or revenue shortfalls. A restaurant with $150,000/month in gross revenue and 30% gross margin has $45,000 available before operating expenses. If operating expenses (excluding debt) consume $38,000, the maximum monthly debt payment the business can consistently support without stress is approximately $7,000 — 4.7% of revenue and within the gross-margin headroom. According to the Federal Reserve's 2025 Report on Employer Firms (findings from the 2024 Small Business Credit Survey), uneven cash flow was cited as a financial challenge by 51% of firms — the third most common challenge behind rising costs of goods/services/wages (75%) and paying operating expenses (56%) — and borrowing in excess of cash flow capacity is a predictable path to default.

Lender Approval vs. What You Can Actually Afford

Lenders approve based on their minimum DSCR threshold — typically 1.15–1.25. That means they will approve a loan amount that still leaves 15–25 cents of operating income cushion per dollar of debt service. But lender approval is the floor, not the ceiling of your affordability. A lender approval at DSCR 1.15 means: if your revenue drops 13% from current levels — a common occurrence in a slow quarter, an economic softening, or the loss of a major customer — your DSCR falls below 1.0 and you can no longer cover your debt payments from operations. A DSCR of 1.40–1.50 is a much more resilient target: it means you can absorb a 30–35% revenue decline before hitting break-even on debt service. The practical question isn't 'will the lender approve this amount?' — it's 'what amount lets me sleep at night if revenue drops 20–30%?' A business is free to borrow less than what it qualifies for, and structuring the request around the DSCR-1.40+ resilience target above — rather than the lender's 1.15 minimum — is often the more durable choice.

Common Over-Borrowing Mistakes

The most common over-borrowing patterns: Borrowing based on optimistic projections rather than historical actuals — applying for an amount that your projected (not actual) revenue would support. Lenders verify historical cash flow; projections are nice to have but don't substitute for track record. Stacking multiple products — taking an MCA, then a term loan, then another MCA on top of each other. Each product adds a new daily or weekly payment, and the aggregate debt service quickly exceeds what the business can support. Not modeling the lean months — a business that can handle a $15,000/month payment in peak season may struggle to service it in slow months; affordability must be tested against the trough, not the peak. Ignoring personal debt obligations — lenders calculate global DSCR including the borrower's personal debt obligations (mortgage, car payments, student loans) for personally guaranteed loans. Personal debt service that consumes a large portion of personal income reduces the owner's ability to inject personal capital if the business has a cash shortfall.

Run your own numbers: the Business Loan Affordability Calculator applies this exact DSCR-1.25 and 10–15%-of-revenue math to your revenue, expenses, and existing debt — output is a conservative max loan amount, not just a ratio. Pair it with the DSCR Calculator to see which financing tier (SBA, bank, non-bank) your file clears at that amount.