As the Loan Program Manager at the Flagship Enterprise Center I often have the opportunity to be the first (non friends and family) lender for small businesses. Typically business owners that have not secured a business loan in the past have no idea what is a realistic loan request. The conversation usually goes like this:
Me: So how much do you think you are going to need in funding?
Entrepreneur: Well what is the largest microloan the Flagship can make?
Me: We can go up to $50,000, but our average loan size is around $13,000.
Entrepreneur: Perfect! I was thinking $50,000.
My guess is that most entrepreneurs who have not gone through the business loan process before end up asking for our maximum loan size right off the bat. Out of 100 microloans we have only made 1 loan of $50,000. The question that business owners need to know the answer to is what is a reasonable request? Let me attempt to give you some principles and rules of thumb that can help you request the right amount of a loan, and ultimately create realistic financial projections for your business.
- Line of Credit = 10% to 15% of annual revenue – As a rule of thumb you are probably not going to get more than 10 to 15% of your annual revenue as a line of credit. So if you come in with revenues of $100,000 and ask for a line of credit up to $70,000 you are not going to find much success. A line of credit is meant to help you manage your cash flow cycle. So if your customers don’t pay for 30 or 45 days, that line of credit will help you fund the business during that month and a half, it should not be used to finance new long term projects.
- Term Loan Not Greater than 25% of Annual Revenue – If you looking to secure a term loan to hire employees, purchase inventory, equipment, or make improvements to your facility, then you should expect 25% or less than your annual revenue. Anything larger, and you just won’t be likely to be able to afford the monthly payment.
- Real Estate Loan = Up to 80% of the value of the real estate – Since real estate loans can be for 20 or 30 years, you can secure a much larger loan as a percent of your revenue simply because your monthly payment will be lower since it is stretched out over 30 years.
Hopefully this gives you some idea of what is a reasonable loan request for your small business or startup. Good luck!