Can Your Business Afford That Loan Offer? How To Calculate Cash Flow Like An Underwriter.



Step 1: Deciding to Obtain Business Funding

(Whether it be a term loan, SBA loan, line of credit, invoice factoring, short term loan, or cash advance).


Business Funding can be used for many reasons. 

  • to relieve slow seasons and boost cash flow (plan ahead when applying for a loan for this reason, don’t wait until the cash flow is gone as it will be harder to get the approval you are looking for if lenders see a slow down)

  • to refinance debt into a longer term and lower payment 

  • to finance new equipment, open up a new location, expand your business, boost your marketing, hire new employees, or start a new business project.

 Often loans get a bad rep, but having access to additional working capital can be extremely beneficial to the business and help your business to grow.  The key is to not wait until you are in need or over-leveraged. Negative cash flow will affect your approvals and terms. As we like to say it takes money to make money. Be smart with your funding, make sure you will get a valuable return on your investment. 



Step 2: Figuring Out What You Can Afford.


Don’t be sold on a bad deal because you are excited to get cash. Know what you can afford in order to avoid the risk of default (not being able to pay back the loan). Please note: Most lenders will work out a payment plan with you if you cannot afford it, or are having trouble making the payments on time. This is to avoid it negatively impacting your credit, however this will affect you getting a loan or as good of an offer in the future because they will see it in your statements and on your record that payments were lowered. So avoid this and know if you can afford the loan up front.


Here’s How:


Debt Service Coverage Ratio (DSCR)/Cash Flow Analysis:


The ratio of cash a business has available for debt. Usually a ratio > 1 is looked for to show that the business’s income can cover debt obligations.Some lenders calculate by the month, others annually- depending on the type of loan. 



Basic Formula: Cash Flow ÷ Loan Payment = DSCR


Annual Net Operating Income + Depreciation and Other Non-Cash Charges ÷ Interest + Current Maturities of Long- Term Debt


EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) ÷ Interest + Current Maturities of Long- Term Debt


Please note: If you are refinancing a loan with the funding you are applying for you would not include this loan in your calculations.


Debt to Income Ratio (DTI): 


Tally up all of your monthly payments in debtor obligations (if you have a daily payment times this by 21 business days) and divide that number by your monthly gross income.


Multiply by 100 and you get the percentage of how much your monthly income exceeds or doesn’t exceed your debt payments.


Usually you don’t want this ratio to exceed 36%. If it does you may not be able to cover the cost of the loan.


Return on Investment (ROI):


Paying back a loan can sometimes cut into cash flow so you will want to see how the loan will impact your business financials. Will it help you grow your business? You do not want to put your business in a financially bad place, and you want to make sure what you use the loan for will be a good, valuable, and beneficial return on your investment.


Ask questions like:

  • By when will I break even on the cost of the loan?

  • What is my estimated total gain on this loan minus the cost?

  • How much do I estimate my revenue will increase with this loan?

  • What is the total cost of the loan? – Sometimes we just look at the payments when comparing loan offers and not the total cost of capital. Determine  what is more important to you; the total cost of the loan, the amount of each payment, or the payback length of term?




Red Flags for Lenders: 



We hope this post was helpful. If you have any further questions or would like to get in touch with us regarding funding for your business, please call 215-970-2085, email, or visit our website at







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