How much should your business borrow?

Borrow the amount your plan needs, plus a modest cushion, as long as the payment fits inside your free cash flow with room to spare. Lenders test that room with the debt service coverage ratio, and most want $1.20 to $1.25 of free cash for every $1.00 of loan payments. Work that math yourself before you call a broker, and you will ask for a number lenders can say yes to.

Start from the need, then test against capacity

There are two numbers in every loan request. The first is what the purpose costs: the equipment quote, the inventory order, the cash gap. The second is what your cash flow can carry. The right request is the first number, as long as it sits under the second.

If the need is bigger than the capacity, you do not shrink the need and hope. You change the structure: a longer term, a down payment, a different product or a lender who counts the new revenue the money will create. A broker earns their keep here.

Debt service coverage in plain words

Debt service coverage ratio, or DSCR, answers one question: how many times over can your business pay its loan payments from the cash it already makes?

DSCR = cash available for debt payments ÷ total annual debt payments

Cash available is usually net profit with interest, depreciation and amortisation added back. Lenders take it from your tax returns, sometimes adding back one-time costs or owner pay above a market salary.

Clear Value Lending puts conventional bank minimums at 1.20 to 1.25, with 1.30 or more preferred on larger loans, and SBA 7(a) at 1.15 on business cash flow and 1.00 on global cash flow, which adds in the owner's personal income and debts. Under the SBA's SOP 50 10 8.1, effective October 1, 2026, GoSBALoans reports the minimum for initial acquisitions and other ownership changes moved to 1.25.

Short term online lenders and merchant cash advance providers rarely quote a DSCR. They look at average daily balances and deposits instead, but they are asking the same question.

A worked example

Bayside Mechanical, a commercial HVAC contractor, wants a $250,000 equipment and vehicle package. Here is the math a lender will run.

At a 1.25 DSCR, total annual payments can be up to $232,000 ÷ 1.25 = $185,600. Subtract the $60,000 already committed and $125,600 a year, about $10,470 a month, is left for new debt.

What that monthly payment supports depends on the term:

The $250,000 request fits easily as a five year equipment loan, with a DSCR of about 1.87 after the new payment of about $5,310 a month. The same $250,000 as a two year loan at a higher rate would push the payment to about $12,700 a month, drop the DSCR to about 1.09 and fail the test. The business did not change. The structure did.

That is the most useful idea in loan sizing: term moves capacity more than rate does. Long life assets belong on long terms, which is why matching the loan to the purpose matters as much as the rate.

Why asking for too little costs more

Owners often trim the request to look modest. It tends to backfire.

• You pay to borrow twice. A second loan means a second origination fee, a second round of closing costs and often a higher rate, because the second lender sits behind the first.
• The second loan is harder to get. The Federal Reserve's 2025 Small Business Credit Survey found that 37% of firms denied at least some financing were told they already had too much debt. The first loan is what makes the second one look risky.
• Short money drifts into stacking. Owners who come up short on working capital often fill the gap with an advance on top of an advance. See loan stacking and why to avoid it.
• The project stalls. Half a truck does not run a route. If the plan needs $250,000 and you borrow $200,000, the remaining $50,000 comes out of operating cash at the worst moment.

The same survey found only 42% of applicants received the full amount they sought, 36% received some and 22% received none. A request built line by line, with its DSCR already tested, is the best defence against being cut.

Why asking for too much also costs

The opposite mistake is quieter. Every dollar borrowed and left idle still costs interest, and on factor rate products you pay the full fee whether you use the money or not. A request far above the plan also makes underwriters ask what the extra is for, which slows the file.

The middle path is a modest cushion inside the request, named as such: "$230,000 package plus $20,000 for install and first month's fuel." Lenders accept a cushion they can see. If the cushion is mainly for surprises, a line of credit you draw only when needed is often cheaper than a larger term loan.

How lenders cap the amount besides DSCR

DSCR is not the only ceiling. Expect lenders to apply one or more of these:

• Revenue caps. Short term lenders size by annual revenue and deposits. OnDeck, for example, offers term loans from $5,000 to $400,000, with the top of that range reserved for strong credit and verified revenue.
• Collateral value. Equipment lenders finance a share of the asset's value, so a down payment may be required on used or specialised equipment.
• Product limits. SBA programs have maximums, and online lines of credit have their own caps.
• Global cash flow. For SBA and bank loans, your personal debts count too.

A broker knows which cap binds first at each lender, and that is often what decides which lender gets your file.

A sizing checklist before you call

1. Build the need line by line from quotes and cash flow forecasts.
2. Add a visible cushion of a size you can justify.
3. Calculate cash available for debt from last year's return.
4. Run DSCR at 1.25 with the new payment at the term that matches the purpose.
5. If it fails, test a longer term or a down payment before cutting the amount.
6. Write the number, its parts and its DSCR on one page for your broker.

Then compare the offers that come back on total cost, not just payment. How to compare loan offers your broker brings shows how.

Find the right lender for the size of your deal

Loan size is one of the strongest filters a broker uses. Search the register for term loan brokers or equipment finance specialists. Every entry carries a register number and a last checked date. If you would rather have AI size the request and run the whole process, businessloanbroker.ai handles it end to end.