When your business needs a business loan, it can sometimes be difficult to know where to turn.

In a series of articles, our business manager, Jordan Berg, dissects the application process to help give you the best chance for success with your business loan application.

The third article in this series explores how to determine what is affordable.

Determining what is affordable

So you’ve reached your figure, now what? Before applying for finance, it’s worth taking time to consider what’s realistic and affordable.

For business loans, consider your debt service coverage (DSC). This is a handy behind the scenes calculation which loan assessors will be judging you on. It totals what money is left in the business to make debt repayments annually.

Calculations can vary but the most simplistic formula would be:
Profit before tax / total of 12 months repayments

This provides a debt service cover multiple – how many times the business can service debt repayments.

For example, if your business makes £50,000 profit per annum, you wouldn’t want your annual repayments to exceed this figure. If you can structure the loan over a longer term, annual repayment totals go down resulting in a high DSC ratio, and the debt service coverage will increase. This reduces the stress to your business when making repayments and increases the chances of a positive lending decision.

The DSC ratio is “good to know” to check you’re in the right ballpark – but do not get too hung up on this.

Some lenders will have minimum figure for DSC, and this will vary between lenders, sectors and size of the business or loan facility. It might be worth discussing this with your lender ahead of your application – most lenders are happy to have an open affordability conversation with you.

What’s Next? For the next article in this series, Jordan will be exploring how to prepare for a successful application.

About SWIG Finance

SWIG Finance is the South West’s leading Community Development Financial Institution. We are passionate about bringing social and economic benefits to people and places in the South West.

We do this by providing support and finance to Start Ups and growing SMEs that can create and secure employment opportunities.

As the South West’s leading delivery partner for Start Up Loans UK, we can provide Start Up Loans from £500 – £25,000. For more information visit https://www.swigfinance.co.uk/start-up-loans/

We also have loans from £25,000 to £250,000 available to South West SMEs who cannot access sufficient funding from their bank https://www.swigfinance.co.uk/business-loans/

For an informal discussion about your funding requirements, get in touch with our friendly and professional team to find out how we can help: info@swigfinance.co.uk / 01872 227 932.