How to Estimate Your Company’s Borrowing Capacity

Knowing your company’s borrowing capacity helps determine how much working capital you can access with the right financial solution.

Borrowing capacity is the maximum amount your business can borrow from lenders. It takes into account your company’s perceived ability to repay the loan in full and on time.

Assessing borrowing capacity involves various factors, from specific metrics like income and existing debts to overall financial health. Understanding borrowing capacity is crucial for making informed financial decisions and achieving sustainable business growth.

What Factors Affect Borrowing Capacity?

What does your company’s borrowing capacity depend on?

Income stability

Businesses with consistent, reliable, and predictable cash flow and revenue generation tend to qualify for larger borrowing amounts from lenders.

Existing debt

Businesses carrying higher levels of debt may have reduced access to additional funding.

Existing assets

Business assets can serve as collateral for a loan or positively reflect your overall financial health.

Credit history

A strong credit score demonstrates responsible financial management, increasing borrowing capacity by lowering perceived lending risk.

Cash flow

Cash flow is calculated by assessing how much money flows into your business each day compared to how much flows out. A significant factor in this calculation is expenses, including operational costs. The higher your expenses, particularly in relation to income, the more your borrowing capacity may be impacted negatively.

Industry type

Different industries come with different risk profiles and challenges that can affect the lending decision of a third-party financier.

Economic conditions

Broader economic factors, like interest rates, can affect a lender’s willingness to provide credit, even to financially healthy businesses.

How to Estimate Borrowing Capacity for Invoice Finance

Invoice Finance allows you to unlock the value of funds owed by your customers. In other words, these cash advances put tomorrow’s money in your pocket today. (To find out more about What is Invoice Finance, read our article.)

By borrowing against your outstanding invoicesyou can improve cash flow and enable ongoing growth and investment.

To estimate your borrowing capacity with Invoice Finance:

1. Assess your outstanding invoices – Calculate the total value of your unpaid invoices.

2. Determine the advance rate – At ScotPac, we lend up to 80% of the total value of submitted invoices.

3. Consider customer creditworthiness – Think about how creditworthy your customers are and how reliable their future payment is.

4. Calculate associated costs – Make sure to factor in relevant Invoice Finance fees to know the total cost of borrowing.

This method of funding ties your borrowing capacity directly to sales performance, so that as your sales grow and more invoices are generated, your capacity to borrow increases correspondingly.

With Invoice Finance, there is no property security needed to access a line of credit. ScotPac’s facility limits range from $10,000 to $150 million, so we are able to support businesses of all sizes.

How to Estimate Borrowing Capacity for Business Loans

Estimating borrowing capacity for Business Loans, can be more complex, as financial institutions differ in their eligibility criteria, calculations, and risk appetites. However, you can gain a clearer understanding of your business’s position by following these steps.

1. Analyse your financial statements

Take the time to gather income statements, balance sheets and cash flow statements. It will give you a good idea of your company’s overall financial health.

2.  Calculate net income

Use this formula to gain a clear idea of how much working capital your business has available to cover operational costs, including potential business loan repayments:

Net Income = Total Revenue – Total Expenses

3.  Assess debt-to-income ratio

To calculate your debt-to-income ratio, divide your total monthly debt payments by your gross monthly income. While lenders generally prefer a ratio below 36%, this is not always the rule.

4. Use online loan calculators

Due to the more complicated and multifaceted nature of business loans, online calculators can be helpful tools for comparing different types of business finances depending on your particular company’s financial data.

When it comes to business loans, there is also a difference between secured loans and unsecured loans. Secured loans require an asset, often property, as security for the lender in case of default. However, with an unsecured loan, there is no need to determine what security-appropriate assets your business may have. In fact, with ScotPac, your business can access up to $100,000 in unsecured business loan funding.

As a general rule, our team can fund up to 100% of your average monthly sales. In other words, if you average around $50,000 per month in sales, you may be able to borrow up to $50,000 in cash.

Find the Right Business Finance Solution with ScotPac

ScotPac is the largest non-bank lender in New Zealand and Australia. With over 35 years of experience and more than 8,500 businesses currently supported by our financial solutions, our team is uniquely positioned to maximise your borrowing capacity and tailor the right business finance solution for you.

You can read more about finding the right lending solution for your business here.

To explore the right business finance solution for your needs or to better understand your company’s borrowing capacity – whether for Invoice Finance or Business Loans – contact the ScotPac team today.