Yet while gross revenue is important, it’s not evaluated on its own. In other words, context, such as the source and frequency of that revenue, also matters to business lenders. This makes it difficult to say exactly how much revenue you need to qualify for a term loan. Therefore, if you’re wondering if you can get a business loan with low revenue, the real answer is it depends. Of course, we know “it depends” isn’t all that helpful of an answer, so in this post we’ll explain how you can evaluate your own situation to see if low revenue is going to stop you from obtaining a loan.
Why Business Lenders Have Revenue RequirementsEvery business financing lender and every loan is different. Generally speaking though, you’ll see revenue requirements range from $10,000 to $30,000 per month and higher. Just remember, these are general figures, and every lender's ranges will be different. What’s more helpful than the quantitative requirements is understanding why lenders have revenue requirements. The revenue requirement serves two purposes. First, it weeds out potential financing applicants who, based on a rough measure (revenue), don't have enough revenue to apply. Second, it helps the lender determine if your business generates enough money to handle your potential debt payments. For example, if the minimum payment on a business loan is $1000 per month and your company has another $6000 in monthly payments, revenue of $10,000 per month clearly isn’t sufficient. If they were to provide you with a loan, it's unlikely that you'd have enough money in your bank account to afford all your responsibilities. Thus, they wouldn't get repaid on-time, and your business would be low on cash flow. In addition, it could affect your business and personal credit scores.
Revenue and the Debt-Service Coverage RatioWhile your gross revenue is a good indicator of your ability to pay off debt, it’s only one piece of the puzzle. To more precisely measure your ability to pay, online lenders use the debt-service coverage ratio which is: Debt-Service Coverage Ratio = Net Operating Income ÷ Total Debt Service This ratio measures the amount of money you receive for every dollar you spend. Typically business loan lenders want to see a ratio between 40 and 50 percent. Also, notice that the debt-service coverage ratio uses net operating income rather than revenue. You can think of net operating income as your revenue minus the direct costs of creating that revenue such as inventory, wages, and rent. By using your net operating income rather than revenue lenders get a better sense of how successful your core business is.
3 Options for Small Business Owners with Low Revenue
1. Wait to Apply for a Revenue-Based Business LoanIt might not be the most exciting option, but if your revenue is too low, now may not be the time to apply for a business loan. If you can hold out and finance your growth through other means, you can position yourself to more easily qualify for a business loan. Plus, as your business matures and builds up its financial health, you can access loans with better interest rates and terms.
2. Consider Funding Options that Don’t Have Revenue RequirementsThough some lenders may have one, the following financing options don’t typically have revenue requirements:
- Accounts Receivable Financing: Turn your invoices into cash with a factoring company to access funding quickly.
- Merchant Cash Advances: Avoid a revenue requirement by using your debit and/or credit card sales to remit payment on a merchant cash advance..
- Equipment Financing: Instead of taking out a revenue-based loan to buy equipment, you can use equipment financing and avoid any revenue requirements.
- Inventory Financing: For borrowers who are looking to fund inventory expenses, inventory financing is a great way to fund these purchases.
- Business Credit Cards: If you don’t need a large loan amount, business credit cards are a good short-term financing option.