How to Determine the Amount of Business Loan You Need

Updated on: 28 Dec 2023 // 5 min read // Business Loans
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Whether your business is just a year old, or you have been running it for a few years now, at one point or the other, you may face the need for additional funds. This requirement may be due to one or more of the following reasons:

  • To purchase assets
  • To expand business operations
  • To buy inventory
  • To acquire working capital

While in the recent years Business Loans are being readily offered by a vast majority of lenders across the nation, the fact is that when you need a Business Loan, your lender takes a good look at your financial situation, both – on a personal level as well as on the enterprise level.

If your credit scores are good enough, your loan application can get approved in a matter of few days, and before you know it, the disbursed loan amount reaches your bank account.

However, just because the loan is available conveniently, you should not get tempered to borrow more than you actually need. After all, regardless of the ease of acquiring the loan, it is still a credit that will need to be repaid with interest. That being said, you should not borrow less than the
required amount, as the limited funds might lead to inefficient execution of your business plans.

So, how do you decide on the loan amount that you should apply? Well, here are some factors which you must take into consideration before zeroing-in on ideal Business Loan amounts.

1. Credit History

As pointed out earlier, the credit history of your business, as well as your personal credit score, play a significant role in determining whether you are eligible for a loan or not. In most cases, banks hesitate from offering loans to business owners with poor repayment history. Even if the loan applications of such candidates are accepted, the applicable interest rate is comparatively high. The higher rate would imply a greater EMI for the same loan amount. Hence, before stepping a foot on the path of loan acquisition, you should have an ideal EMI in your mind, which you can pay consistently without putting any strain on your financial situation.

Based on the interest rate that your loan is being approved at, you can choose to increase or decrease the loan amount, such that the final equated monthly instalment (EMI) is equivalent to the one you think you can manage to pay.

2. Collateral

If you do not enjoy a respectable credit score, and can’t afford to pay high interest rates on your Business Loan, you should seek a secured business loan. In this loan type, you can offer a commercial, industrial or residential property as collateral against the loan amount.

Here, the loan amount is largely dependent on the value of the property that you offer as collateral. Generally speaking, the loan amount is 55 to 90% of the market value of the property. This concept is known as LTV or Loan to Value ratio. Hence, for a property with a market value of Rs. 10 Lakhs, you can expect a loan amount ranging between Rs. 5.5 Lakhs to Rs. 7 Lakhs, though some banks may be willing to pay higher.

Since the bank will enjoy an added security in case you default on the repayment, it will be willing to offer you a loan on a low-interest rate. Once the loan is repaid in full, the bank will hand over the property back to you.

Needless to say, you should only risk your property if you are entirely confident of the fact that your business will grow steadily enough, so that you can conveniently repay the loan without any defaults.

3. Income

As a rule of thumb, the total EMI you pay per month should not exceed 40% of your monthly income, since this is, more or less, the amount that you can shell out month after month without experiencing a financial crunch.

While most lenders look at bank statements of savings accounts to determine the income of the applicant for a personal loan, in case of Business Loans, the bank closely analyses your revenues as well as your Profit and Loss Statements. As must be readily understood, it is convenient for a growing business to get quick loan approvals, as against the firms which are trying to survive in tricky waters.

To this end, it is a great choice to send across all the relevant documentation for the lender to see and verify your financial history.

4. Other Obligations

While you may be making decent profits from your business, the banks will still wish to take a quick look at your monthly expenses and liabilities of a fixed nature. This may include everything – right from the rent of your office space to the salary for your employees, from your car loan EMI to the marketing costs.

After taking into account these expenses, if the bank still feels that your remainder income will be sufficient for you to pay back the Business Loan, it will readily approve your loan application even for comparatively high loan amounts.

5. Business Plan/Project Outline

Asper our financial experts, the best way to determine the amount of Business Loan you require is to make an investment plan. When you apply for the business loan, let the lender know, in detail, about how you plan to use the said money to grow your business, or to fund a new and distinct project. This will help the lender understand how and by when will your investment start making a profit, thus helping you acquire the desired loan amount with added ease.

We hope that you are now aware of the few aspects that need your due diligence in order for you to determine the ideal loan amount for your business needs. While these factors will guide you, it is up to you and only you to introspect whether you need a loan or not and if you do, what should be the loan amount. All said and done, you must only take the credit if you have a concrete and productive plan which is sure to yield results. The goal is to keep the loan amount as well as the EMI low enough so that you can conveniently repay it over the stipulated tenure.