Getting a Business Loan With Low Revenue
Business is doing well for you but maybe you'd like to invest in some new equipment or open up a second location. With a great business plan, and your consistently high credit score, you shouldn't have a problem getting working capital, right? But there's one key factor missing in your assessment: Your low revenue.
Lenders typically require $10,000 to $30,000 per month and higher for business loan applicants; online lenders tend toward the lower end of that range, while traditional banks range higher. But why does revenue matter? Most important, a revenue requirement helps a lender determine the likelihood of your ability to repay a loan per its designated terms.
For example, your loan may require a $1,000-per-month minimum payment. If your average revenue is $5,000 per month, that's a larger chunk of your proceeds to pay out, considering other expenses, such rent, payroll, insurance, supplies, and more. In this case, an approval is highly unlikely.
Revenue and debt: They're closely related
Some lenders also measure your ability to repay using what's called the debt-to-service coverage ratio (DSCR). This is your net operating income divided by total debt service. The result quantifies your company's cash flow versus its debts, as expressed in a ratio. While different industries and business types have their preferred ratios, most lenders require a 1.25 ratio.
Note that the DSCR uses net operating income rather than revenue. Your net operating income is your revenue, minus the direct costs of creating that revenue such as inventory, wages, and rent. By using your net operating income rather than revenue, lenders get a more precise reading on the success or your business.
Has your revenue fallen short?
What can you do if your business doesn't earn enough to qualify for the business loan you want?
1. Seek out other lenders.
You might decide to pursue other types of formal financing. Other types of capital funding include:
Microloans: For loan amounts of less than $50,000, online lenders may offer favorable terms.
Accounts receivable financing: A factoring company can provide funding against your pending invoices to provide quick cash.
Revenue advances: This method is similar to Account Receivable financing. The lender will provide you with quick capital, then draw on your debit and/or credit card sales.
Equipment financing: The equipment you're purchasing is the collateral. This makes revenue less of a factor.
Business credit card: If you don't need a large loan amount and can handle the higher interest rates, a credit card can meet short-term financing needs.
2. Reduce your debt.
Improve your DSCR by paying off what you owe. While this won't get you past a high revenue requirement, it can make a positive difference if you're close.
3. Ask family or friends to invest in your business.
In some cases, it's worth asking your inner circle to invest in your success. But consider this option carefully, as money and relationships don't always mix well.
4. Give it time.
If your revenue is too low, now may not be the time to apply for a business loan. If you can finance your growth through other means, you'll be in a better position for a business loan. As your business matures, you can access loans with better interest rates and terms.
Taking smart risks is part of doing business. but taking on debt that you don't have the revenue to cover is a recipe for failure. An eye on the long-term health of your company — and borrowing responsibly — can help you assume a manageable amount of risk.
It's not just you
Only a little more than half of small businesses — 51% — that applied for financing in 2023 were fully approved.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
