How to Calculate If You Can Afford a Business Loan Payment
Learn to calculate your debt service coverage ratio (DSCR), assess cash flow impact, and determine the maximum loan payment your business can handle.
Getting approved for a loan is only half the battle. The more important question: can your business actually afford the payments without strain?
This guide shows you how to calculate affordability before you apply.
The Core Metric: Debt Service Coverage Ratio
DSCR measures whether your business generates enough cash to cover debt payments:
| Formula | Example |
|---|---|
| DSCR = Net Operating Income / Total Debt Service | $150,000 / $100,000 = 1.50x |
What Lenders Want
Most lenders require DSCR of 1.25x or higher. This means for every $1 in debt payments, you generate $1.25 in operating cash flow. Higher is better; 1.50x+ is strong.
Step 1: Calculate Your Net Operating Income
NOI is your business cash flow available for debt payments:
- Start with revenue: Total sales for the period
- Subtract operating expenses: Rent, payroll, supplies, utilities, insurance
- Do not subtract: Interest, depreciation, amortization, owner draws, one-time expenses
- Add back owner salary: If you pay yourself W-2, add reasonable portion back
Example calculation:
| Item | Monthly Amount |
|---|---|
| Gross revenue | $85,000 |
| Cost of goods sold | -$35,000 |
| Operating expenses | -$30,000 |
| Owner add-back (50% of salary) | +$5,000 |
| Net Operating Income | $25,000 |
Step 2: Calculate Total Debt Service
Include all existing and proposed debt payments:
- Existing loans: All current business loan payments
- Proposed loan: The new payment you are considering
- Leases: Equipment leases and vehicle payments
- Credit lines: Minimum payments on lines of credit
- Real estate: Commercial mortgage if applicable
Example:
| Debt | Monthly Payment |
|---|---|
| Existing equipment loan | $2,500 |
| Proposed new term loan | $8,000 |
| Equipment lease | $1,500 |
| Total Debt Service | $12,000 |
Step 3: Calculate Your DSCR
Divide NOI by total debt service:
| Calculation | Result | Interpretation |
|---|---|---|
| $25,000 / $12,000 | 2.08x | Strong coverage, easily affordable |
| $15,000 / $12,000 | 1.25x | Minimum acceptable, tight margin |
| $10,000 / $12,000 | 0.83x | Cannot afford this payment |
Below 1.0x Is Dangerous
A DSCR below 1.0 means you cannot cover the payment from operations. You would need to use savings, owner contributions, or go into further debt. Do not take a loan you cannot service.
Step 4: Back-Calculate Maximum Affordable Payment
Work backwards to find your ceiling:
- Target DSCR: Use 1.35x for safety margin (above minimum 1.25x)
- Formula: Maximum payment = NOI / Target DSCR
- Example: $25,000 NOI / 1.35 = $18,500 max total debt service
- Available for new loan: $18,500 - $4,000 existing debt = $14,500
Monthly vs. Daily Payment Considerations
Payment frequency affects cash flow differently:
| Frequency | Pros | Cons |
|---|---|---|
| Monthly | Easier to budget, aligns with bills | Larger single payments |
| Weekly | Smaller amounts, smooths cash flow | More transactions to track |
| Daily | Smallest per-payment amount | Can strain daily cash, fees add up |
Seasonal Business Considerations
If revenue varies by season, test affordability at your low point:
- Calculate monthly NOI for your slowest quarter
- Test DSCR using low-season numbers
- Build cash reserves during peak season
- Consider seasonal payment structures if available
- Maintain 3-6 months of payment reserves
Stress Test Your Numbers
Calculate what happens if revenue drops 20%. Can you still make payments? If not, consider a smaller loan amount or longer term.
Red Flags: Signs the Loan Is Too Large
Reconsider if any of these apply:
- DSCR below 1.35x: Too little margin for error
- Payment exceeds 15% of revenue: May strain operations
- No cash reserves: One bad month could cause default
- Required to cut critical expenses: Undermines business growth
- Dependent on future growth: Borrow based on current performance, not projections
Affordability Worksheet
Complete this calculation for any loan you consider:
- [ ] Calculate monthly Net Operating Income: $______
- [ ] List all current debt payments: $______
- [ ] Add proposed new payment: $______
- [ ] Total debt service: $______
- [ ] Calculate DSCR: ____x
- [ ] Is DSCR above 1.35x? Yes/No
- [ ] Test with 20% revenue decline: ____x
- [ ] Months of reserves available: ______
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Related Articles
What is DSCR? (Debt Service Coverage Ratio)
Learn what Debt Service Coverage Ratio means, how lenders calculate it, and what DSCR you need to qualify for business financing.
Read more →How Your Monthly Revenue Affects Your Loan Options
Understand revenue-based underwriting, Debt Service Coverage Ratio basics, and what different revenue ranges unlock for business financing options.
Read more →Cash Flow: Understanding Money Movement in Your Business
Learn what cash flow means, how lenders evaluate it, and why cash flow management is essential for business financing.
Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
Third-Party Lenders: All loan products are offered by independent third-party lenders. Liminal Lending Co. is an Independent Sales Organization (ISO) and receives compensation from lenders for successful referrals. Terms and conditions of any loan are between you and the lender.
Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.