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Wondering how much of a loan your small business can afford? Use our free calculator to find the best deal for you.
Then, learn all about how small business loans work, from their interest rates to how to get a loan as a freelancer.
Math can be scary to business owners. But the truth is, figuring out your small business loan doesn’t have to be overwhelming. Our free calculator will help you figure out how a loan will impact your bottom line.
Read about how to use this tool right below, or skip ahead to the next section if you just want to learn more about how business loans work.
Simply enter this info into the small business loan calculator above:
💲 Your total business loan amount
How much you’re looking to borrow from the bank.
🔢 The annual interest rate of your loan
Here you can either enter your fixed rate, or see how different rates on a variable loan will affect your payments month to month.
🗓️ The length of your loan
Entered in years, this will help you determine whether a short-term or long-term loan is best for your business.
💵 Extra monthly payment
Paying more than the minimum can help you save money over time by reducing how long you pay interest.
By experimenting with different loan amounts and terms, you can easily see how your loan will be affected. Here’s what the calculator will show you:
🗓️ Monthly payment
Here’s how much you’ll have to budget for every single month. Plug in different numbers and see how your payment amounts change!
📈 Average monthly interest
This is the amount of your monthly payment that’s going towards your interest. You can actually write off this amount as a business expense — more on that later!
🧮 Total interest
Here’s how much interest you'll be paying over the whole life of the loan.
⏳ Number of years
You already entered the length of your loan term above. What this shows you is how any extra monthly payments you make will shorten your loan term.
For example, say you borrow $30,000 at a 5% interest rate as a 10-year loan. If you pay an extra $100 every month, you’ll actually finish paying it off in just over seven years (7.12, to be exact).
💰Total borrowing cost
This is how much you’ll be spending on your loan after all the interest is taken into account.
For example, borrowing $30,000 at 5% over 10 years will actually cost you $38,183.39.
According to the Small Business Administration (SBA), business loans typically range anywhere from 10-25 years, depending on what you’ll be financing. (Improvements to commercial real estate typically get the longest loan terms.)
That’s a pretty big range! Whether you go for a long or short loan, it’s important to remember that you’ll need to keep up with all your payments.
Longer loans offer more flexibility and less risk. A short-term loan with higher monthly payments will cost you less in interest. But if you can’t pay that bill consistently, it’ll hurt you far more than a longer, cheaper payment obligation.
Business loan interest rates are usually based on the national prime interest rate. That number can vary quite a bit, once reaching a historic high of a whopping 21.5% in the eighties! But thankfully, it usually stays below 6%.
Small businesses can expect their loans to be several percentage points higher than the prime interest rate — even higher in a recession.
How many percentage points a lender adds to the prime interest rate depends on what they think your business’s “risk factors” are. (We’ll get into the sort of things banks consider in a moment.)
Variable loans are ideal during times of economic hardship, while fixed-rate loans are best when the market is flourishing.
Good news: No matter how high your interest rate goes, you can save money on your taxes by writing off your business loan interest.
Yes, it’s true: Taking out a business loan can help you grow your company and lower your tax bill. For people who have to deal with self-employment taxes, that can be a big help.
Business loan interest is just one of the many business expenses Keeper Tax can take off your taxes — automatically! By scanning your transactions as they come in, Keeper Tax makes sure you’ll never miss an opportunity to save.
The first thing you should figure out is how much you think your business can afford. This can be sobering, but it’s important to go into the loan application process with an honest view of your business’s finances.
Aside from testing out different numbers in our business loan calculator, the next best way to determine this is to figure out your debt-service coverage ratio (DSCR).
Your DSCR is the difference between:
It’s the number lenders will look at first when you apply for a business loan. A higher number is better. (A DSCR over 1 means you’re bringing in more money than you owe.)
To calculate your business’s DSCR, you’ll need to do the following math:
Calculating your net operating income
To find your net operating income you’ll take what your business brings in and subtract everything you spend on running it. In other words, it’s the business’s gross income minus expenses.
Let’s say your new small business brings in $60,000 a year. It spends:
That means it has $3,700 a month in operating expenses, or $44,400 a year. $60,000 - $44,400 gives this business a net operating income of $15,600.
Be careful not to include any debts on this calculation! For example, rent would come out of this number, but a mortgage will go toward your debt obligations in the next step.
This number also shouldn’t include your “tax-only” expenses, like your home office deduction.
Calculating your debt obligations
That same business also has some debts. In this case, it owes:
This gives them a monthly debt obligation on $750, or a yearly obligation of $9,000 ($750 x 12).
Using net operating income and debts to find your DSCR
Now that we have both the numbers we need for this business, we can determine its DSCR!
In this case, the business has $15,600 in net operating income, and $9,000 in debt obligations. Divide them, and you see that its DSCR is 1.73.
The higher your DSCR, the more profitable your business. In our example above, your business takes in 73% more than it spends.
An ideal DSCR will vary from bank to bank, but a good minimum to shoot for is 1.25. That’s because 25% of your net operating income is considered a fairly acceptable amount of debt for a business to take on.
Using your DSCR to determine your potential loan amount
To figure out how much a bank will probably lend you, simply divide your net operating income by 1.25, the minimum DSCR most banks like to see.
In the case of our business, that would give us:
So this business can probably afford a loan somewhere in the range of $12,480.
Note that our example business has a DSCR of 1.73 — more than the recommended 1.25. So they could ask for a larger loan. But to stay profitable, they probably shouldn’t.
As a borrower, the first thing you’ll need to decide is which lender to apply for a loan with. (To get you started, we’ve compiled a list of the best banks for small businesses.)
Here’s a four-step process to help you increase your odds of getting the right loan for your business.
Ideally, you’ll start with the bank that you already use for your business. The history you’ve built together will go a long way in helping them assess your business finances.
That’s especially true of small banks, where the people making financial decisions are more likely to know you and understand the community your business serves.
Beyond an established history, though, there are a few things you should put together to make the best case for your loan that you can.
Each lender will have unique, specific information they’ll look at to determine who they lend money to, but the main factors remain the same. You’re going to want detailed financial statements and documents that demonstrate:
Before you approach a lender, get a copy of:
Even if you’re lucky enough to get approved for a business loan at the very first lender you approach, it will help you negotiate the best deal if you have numbers from other banks to use as leverage.
Ask around, and get interest rate quotes from multiple banks. If you can, try to dig into what kinds of businesses each bank typically funds. Some banks are strongly associated with certain industries, like Silicon Valley Bank with tech.
Yes, but it’s more complicated than for other small businesses, requiring great recordkeeping and an excellent credit score.
The biggest reason lenders hesitate to finance freelancers is that there’s no built-in separation between your personal finances and business finances.
Even if you have a separate small business bank account, you’re still personally liable for expenses that your business alone can’t cover. That means banks are really assessing your personal financial security when they decide whether or not to give you a loan.
Since they’re looking at lending you large sums of money, that understandably gives them pause. However, that doesn’t mean you’re out of luck if you need funding to grow your business.
There are a few things you can do that will improve your odds of getting a business loan as a freelancer.
This will help on two fronts. It:
If you’re Type A, you probably already have a dozen spreadsheets documenting the path of every penny that passes through your possession. However, for the rest of us, tracking expenses can feel like a daunting task.
Keeper Tax takes the stress out by letting you mix personal and business finances in the same account, and still have the paper trail you’ll need for a loan.
By scanning your transactions and creating downloadable reports, the app makes it easy to put together the profit and loss statements lenders love to see.
This one’s definitely easier said than done. But the cold truth is a high credit score is much more likely to yield positive results, especially for businesses banks don’t typically like to fund.
It’s still not a guarantee, but freelancers should aim for a credit score in the 700-800 range to secure a business loan. The farther you are from that mark, the less likely a bank is to agree.
If a standard business loan isn’t in the cards, there are other options that freelancers have. These include:
It's possible that a funding source other than a traditional bank will be better able to meet your business needs.
Whether you’re a freelancer or a small business owner with employees, getting a business loan can help you take your work to the next level.
It won’t be a fast process, but with the right preparation, solid records, and a strong business plan, you’ll greatly increase your chance of success. Good luck!