How Much Can My Business Borrow? The Three Limits Lenders Check

Lenders don’t use one magic number to decide how much you can borrow. They work out three separate limits and lend the lowest of the three:

1. Cash flow limit: how much your business can repay from what it earns.
2. Leverage limit: how much total debt is sensible for a business of your size.
3. Security limit: how much your collateral would cover if things went wrong.

Knowing all three before you apply helps you ask for an amount the bank can approve, rather than one that gets cut back or declined.

Limit 1: what your cash flow can repay

This is the main test for most lenders. They start with the cash your business generates that is available to pay debt. In a simple version, that is EBITDA minus taxes and the regular capital spending you need to keep running. They then divide it by the minimum debt service coverage ratio (DSCR) they need, which is often around 1.20 to 1.35.

Maximum annual debt payments = cash available for debt service ÷ required DSCR

Example:

• Cash available for debt service: $150,000 a year
• Required DSCR: 1.25
• Maximum total debt payments: $150,000 ÷ 1.25 = $120,000 a year
• Existing loan payments: $30,000 a year
• Room for new payments: $90,000 a year, or $7,500 a month

Next, turn that monthly payment into a loan amount. At 9% over 5 years, $7,500 a month supports a loan of about $361,000. Over 7 years the same payment supports about $466,000. A longer term raises your limit, but the lender will only give you a term that matches what the money is used for.

We cover the ratio in more depth in understanding DSCR. Our DSCR calculator checks your own figure.

Limit 2: how much total debt you can carry

Even if the cash flow works on paper, lenders don’t like a business to carry too much debt compared with its earnings. A common measure is total debt ÷ EBITDA. Many lenders are comfortable with small and mid-sized businesses at around 2.5 to 3.5 times. The exact level depends on the industry, how stable your earnings are, and the lender.

Example:

• EBITDA: $180,000
• Maximum debt at 3.0 times: $540,000
• Existing debt: $100,000
• Room for new debt: $440,000

Limit 3: what your security is worth

If you offer collateral, the lender only lends a percentage of its value, called the loan-to-value (LTV) ratio. Property often supports 60% to 75%. Equipment and vehicles usually support less, and receivables and stock less again, because they are harder to sell for full value.

Example:

• Equipment and property valued at $400,000
• Lender’s LTV: 70%
• Security limit: $280,000

Learn more in collateral and loan-to-value, or run the numbers with our LTV calculator.

Putting it together

In this example, security is the limit that holds the business back. To borrow more, the owner could offer extra security or a guarantee. They could also borrow less now and come back after showing a year of strong repayments. Some lenders also offer government-backed guarantee schemes that cover part of the risk where collateral is short.

Our business borrowing capacity calculator runs all three tests at once.

Things that quietly reduce your limit

• Owner withdrawals. Large drawings or dividends reduce the cash available to repay debt.
• One-off profits. Lenders take out one-time gains, such as an asset sale, from your earnings.
• Weak or late accounts. Lenders give less weight to management accounts than to audited or filed accounts. They may also apply a bigger safety margin.
• Personal credit problems. For small businesses, the owner’s credit history often affects the decision. See personal credit vs business credit.
• Interest rate buffers. Many lenders test whether you could still repay if rates rose by 2 to 3 percentage points. If you only just pass at today’s rate, you may not pass their test.

How to raise your borrowing capacity

1. Pay off or refinance small, expensive loans so they don’t use up your repayment capacity.
2. Collect from customers faster and keep stock tight. This frees cash and improves the figures lenders look at.
3. Ask for a term that matches the asset’s useful life, as long as you don’t stretch it beyond what makes sense.
4. Prepare clean, timely accounts and a simple cash flow forecast.
5. Find out which of the three limits holds you back, and work on that one first.

Run your own numbers: use our free borrowing capacity calculator to check your figures before you speak to your bank.

Sources and further reading

• State Bank of Pakistan: Laws and Regulations (Prudential Regulations)
• U.S. Small Business Administration: Loans

This article is general information, not financial advice. Each lender sets its own criteria. Speak to your bank or a qualified adviser about your own situation.

Related guides

• DSCR Explained: Formula, What Counts as a Good Ratio, Stress Tests and How Banks Use It
• Collateral for a Business Loan: What Banks Accept and How They Value It
• Break-Even Analysis: How to Calculate It and Why Lenders Ask

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