Depending on the business lender and loan type, you may be able to borrow anywhere from $1,000 to over $5 million. The ideal business loan amount depends on your unique business, goals, and finances. To make it easier for you to choose the right small business loan amount, we’ve compiled this handy guide.
What is the Average Business Loan Amount?
The business loan amount average is $633,000, according to the most recent data from the Federal Reserve. Since there are countless business lenders and loan programs out there, this figure isn’t necessarily useful. The average small business loan amount for a Small Business Administration (SBA) 7 (a) loan, for example, is likely very different from the average loan amount that you'll get if you apply through an alternative lender or large national bank.In addition, the type of loan you apply for may affect the amount you're approved for; term loans, business lines of credit, and merchant cash advances all typically have varying amount guidelines. Therefore, it makes sense to look past the average loan amount and consider your specific situation.
9 Factors to Determine the Right Business Loan Amount
Every small business owner has different financing needs, so it's important to examine your financial situation. To figure out the ideal small business loan amount for your business, think about the following factors:
1. How You Plan to Use the Loan Funds
Ask yourself what you’ll use the proceeds for; if you want to buy commercial property, you’ll likely need to borrow more money than if your goal is to cover marketing or inventory costs.Once you determine thepurpose of your loan, conduct research to discover how much it will cost you to buy that property, pay for marketing or inventory, afford payroll, or afford your other goals. It's important that you take out a loan amount that covers your costs, while also ensuring that you can pay off your loan amount on-time.
2. Loan Profitability
Loan profitability refers to the total revenue you earn from the use of the business loan. Ideally, your revenue will surpass the total costs of the loan. It’s wise to choose the smallest loan amount from which you can generate a profit. Unless you can use them to earn more money, taking out a larger loan amount probably isn't worthwhile.
3. Loan Timing
In some cases, you may need the money right away; other times, you can wait weeks or even months for it. Often, business owners have immediate funding needs that require them to start the application process immediately. Due to this, they want to avoid lengthy approval processes, which often come with bank loans.If you decide you have an immediate funding need, you probably won’t be able to take out a large loan amount. In most cases, higher loan amounts come with a lengthier loan application process and longer approval period. However, this isn't always the case, so be sure to ask your lender about their loan ranges before you apply.
4. The Cost of the Loan
You’ll have to pay interest on the loan you receive. After a lender provides you with an interest rate for your loan, do the math. Calculate how much it will cost you to borrow your preferred loan amount. Don’t forget to include any fees, as these can raise the cost significantly.If you find that the cost of borrowing is too high, you may want a lower business loan amount that you can comfortably afford to repay.
5. YourBudget And Cash Flow Projections
Take a close look at your monthly budget. If you don’t have a lot of money left over to cover loan payments, you’ll probably be better off taking out a smaller loan amount. Otherwise, you may overextend yourself and steer into a cycle of debt.Remember, it’s better to borrow too little than too much, and note that lenders usually prefer borrowers’ debt makes up no more than 36% of their monthly income.
Just because you want to borrow $50,000 doesn’t mean a business lender will provide you with an offer for that amount. If youdon’t have the best credit score, there’s probably a cap on how much you can borrow, especially if you're applying for a traditional bank loan.On the other hand, if you have good or excellent credit, you’re likely to get approved for as much money as you request.
7. Time in Business
Often, business lenders have atime in business requirements which can disqualify new business owners.You may have a more difficult time getting approved for a large business loan amount if you’re a startup or newer business. On the contrary, if you’ve been around for quite some time and have a track record of consistent revenue growth, your chances of securing a large business loan are fairly high.
If you have fair or poor credit, securing a business loan to collateral or an asset you own can help you get approved for more money. Determine if you have collateral you’re willing to risk to land a larger loan amount. The lender will seize your collateral if you default on your loan so make sure you’re comfortable with the fact that may happen.
9. Future Business Financing Needs
If you have plans to expand in the future, you’ll likely require financing. If so, you’d be better off with a smaller loan now so you can repay it, build your credit, and secure a larger loan down the road. Considering your future financing needs will help youchoose the right small business loan amount for your current situation.
Conclusion: Be Smart About Your Business Loan Amount
Ultimately, the right small business loan amount depends on your particular needs and preferences. Since borrowing too much or too little can deter you from your goals, it’s important to establish this figure. Your end goal should be to come up with a loan amount that keeps your company afloat without submerging it in debt. Once you uncover the magic number, shop around and explore the lenders that may offer you a loan.