Can Your Business Afford a Loan?
A loan approval doesn't mean you can afford the loan. Lenders decide whether they'll give you the money. You need to decide whether your business can survive the payment.
The number that matters is your debt service ratio: the percentage of your monthly revenue that goes to loan payments. Most financial advisors draw the line at 15%. Above 20%, your cash flow starts getting squeezed. Above 25%, you're one slow month away from missing a payment.
Here's how it works with real numbers.
Scenario: $50,000 loan at 8% interest over 5 years. Your monthly payment is $1,014. If your business does $15,000/month in revenue, that payment is 6.8% of revenue. comfortable. If your business does $8,000/month, that same payment is 12.7%. manageable but tight. At $5,000/month revenue, it's 20.3%. risky.
| Monthly Revenue | Payment | % of Revenue | Risk Level |
|---|---|---|---|
| $5,000 | $1,014 | 20.3% | High risk |
| $8,000 | $1,014 | 12.7% | Manageable |
| $10,000 | $1,014 | 10.1% | Moderate |
| $15,000 | $1,014 | 6.8% | Comfortable |
| $25,000 | $1,014 | 4.1% | Easy |
The same loan amount looks completely different depending on your revenue. This is why lenders look at your financials, but it's also why you need to run the numbers yourself. because a lender might approve a loan that technically qualifies but practically strangles your cash flow.
Interest rate changes the math significantly. That same $50,000 loan at 12% instead of 8% jumps to $1,112/month, an extra $98 that compounds over 60 months into $5,880 in additional interest. Online lenders often charge 12–25% for small business loans. SBA loans are cheaper (6–13%) but harder to get and slower to close.
| Loan Amount | Rate | Monthly Payment | Total Interest | Total Paid |
|---|---|---|---|---|
| $50,000 | 6% | $967 | $7,998 | $57,998 |
| $50,000 | 8% | $1,014 | $10,828 | $60,828 |
| $50,000 | 12% | $1,112 | $16,735 | $66,735 |
| $50,000 | 18% | $1,270 | $26,186 | $76,186 |
The total cost of the loan is what you should focus on, not just the monthly payment. A $50,000 loan at 18% costs you $76,186 total. you're paying back 52% more than you borrowed. At 8%, you pay back $60,828. still $10,828 in interest, but far more reasonable.
Before you apply, ask three questions.
First, can my revenue cover the payment at 15% or less of monthly revenue? If not, either borrow less or wait until revenue grows.
Second, what happens if revenue drops 20% for two months? If the payment becomes unmanageable during a slow period, the loan is too large for your current business size.
Third, is the return on the borrowed money higher than the interest rate? If you're borrowing at 10% to fund something that generates 25% returns, the math works. If you're borrowing at 10% to cover operating expenses with no growth plan, you're just buying time.
Use the Business Loan Calculator to see your actual monthly payment, what percentage of revenue it represents, and what the loan costs over its full term. The How Much tab flips the question. start with what your business can handle and work backward to the loan amount.
Frequently Asked Questions
What percentage of revenue should go to loan payments?
Under 15% is considered safe for most small businesses. Between 15–20% is tight but workable if your margins are healthy. Over 20% puts significant pressure on cash flow and leaves little room for unexpected expenses or slow months.
How do I know if my business can afford a loan?
Divide the monthly loan payment by your average monthly revenue. If the result is under 0.15 (15%), the loan is manageable. Also stress-test it: if your revenue dropped 20%, would you still be able to make the payment?
What interest rate should I expect for a small business loan?
SBA loans: 6–13%. Traditional bank loans: 5–10% for qualified borrowers. Online lenders: 8–30% depending on your credit score, time in business, and revenue. The rate you get depends heavily on your business's financial profile.
Is it better to take a shorter or longer loan term?
Shorter terms mean higher monthly payments but less total interest. Longer terms mean lower payments but more interest over time. The right choice depends on your cash flow. If a 3-year term makes the payment too high relative to revenue, a 5-year term might be safer even though it costs more in interest.