Finance Calculator
Loan Affordability Calculator
Estimate how much your business could afford to borrow based on net operating income, existing commitments, and the debt service coverage ratio lenders typically require.
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What is Loan Affordability?
Loan affordability measures whether a business can comfortably meet repayments based on its income and existing commitments. Lenders assess affordability to determine maximum borrowing capacity and lending risk.
How does loan affordability work?
Loan affordability is about how much debt service your business cash flow can support. Lenders assess this by looking at your net operating income relative to total debt obligations - current and proposed.
The debt service coverage ratio (DSCR) is the standard measure. Most lenders require a minimum DSCR of 1.25x, meaning your operating income must be at least 125% of total annual debt service. Some lenders may accept 1.15x with strong security; others may require 1.5x or higher.
Maximum Total Debt Service = NOI / Target DSCR
Available for New Debt = Max Total Debt Service − Existing Debt Service
Max Borrowing = PV of annuity at given rate and term for that annual payment
Assumptions and caveats
- •Net operating income should reflect sustainable, recurring cash flow - not one-off gains.
- •Lender DSCR thresholds vary by sector, security, and borrower profile. 1.25x is common but not universal.
- •This model assumes a fixed-rate, fully amortising loan structure.
- •Results are indicative. Actual borrowing limits depend on comprehensive lender assessment.
Worked Example
Scenario
A consultancy business has monthly net profit of GBP 18,000 and existing monthly debt repayments of GBP 3,200. The lender uses a maximum debt service ratio of 40%.
Calculation
- Maximum Affordable Debt Service = 18,000 x 40% = GBP 7,200
- Available for New Borrowing = 7,200 - 3,200 = GBP 4,000
- Maximum New Loan (3 years at 8%) = approximately GBP 127,000
What This Means
Based on the 40% affordability threshold, the business can support GBP 4,000 per month in additional debt repayments, which translates to a new loan of approximately GBP 127,000 over 3 years at 8%. Lenders use affordability tests to ensure businesses can service debt without compromising operational cash flow. The remaining 60% of net profit must cover tax, reinvestment, and shareholder distributions.
Frequently asked questions
Lenders typically assess affordability by comparing your net operating income against proposed debt service payments. The DSCR is the most common measure - most lenders want to see at least 1.25x coverage.
DSCR measures how many times your available income covers your debt repayments. A DSCR of 1.25x means you earn 25% more than needed to cover debt obligations.
Typically EBITDA or operating profit before interest and tax. It represents the cash available to service debt.
No. This provides an indicative estimate only. Actual borrowing capacity depends on lender criteria, security, sector, and credit history.
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