How to calculate what your business can afford

Affordability is a cash question, not a profit one

A profitable company can still be unable to afford a loan, because repayments are made from cash, not from profit. Profit includes money you are owed but have not yet received; a repayment has to be met from the cash actually in the bank on the day it falls due. So the first principle of affordability is simple: work it out from your cash flow, not your profit and loss.

Lenders think the same way. When they assess your application, they are really asking one question — can this business generate enough surplus cash, reliably, to cover the new repayment on top of everything it already pays? Doing that calculation yourself before you apply means you borrow an amount you can actually service, and you walk into the conversation with the numbers already in hand.

Step by step: the calculation

Follow these steps using your real figures. Twelve months of recent data gives a far more honest answer than a single good month.

1. Start with operating cash flow. Take the cash your trading actually generates each month — money in from sales, less money out for stock, wages, rent, VAT and overheads.
2. Subtract existing commitments. Deduct repayments on any loans, leases or asset finance you already have.
3. Find your free cash. What remains is the surplus available to service new borrowing.
4. Apply a safety margin. Don't commit all of it. Leaving roughly 20–25% as headroom protects you against a slow month.
5. Check the debt service cover. Divide your available cash by the proposed repayment — see the next section.
6. Stress-test it. Re-run the numbers assuming your biggest customer pays late or sales dip 15%.

Use debt service cover (DSCR)

The debt service coverage ratio is the single most useful affordability figure, and it is the one lenders lean on. It compares the cash available for repayments with the repayments themselves:

DSCR = cash available to service debt ÷ total debt repayments

A DSCR of 1.0 means you can just cover repayments with nothing to spare — too tight. Many lenders look for around 1.25 or higher, meaning you generate at least £1.25 of cash for every £1 of repayment. That extra 25p is your buffer for a bad month. If adding the new facility pushes your ratio below that, you are borrowing too much — either reduce the amount or lengthen the term to lower each payment. Working the ratio out yourself shows you the ceiling before a lender does.

Stress-test before you commit

A figure that works on a good month is not affordability — it is optimism. Pressure-test your number against the things that actually go wrong:

• Late payment. What happens to the calculation if your largest customer pays 30 days late?
• A revenue dip. Re-run it with sales down 15–20%. Does the repayment still clear comfortably?
• A cost shock. A rent review, a tax bill or a price rise from a key supplier.
• Seasonality. If your income is lumpy, can you meet the repayment in your thinnest month, not your average one?

If the repayment survives those scenarios, it is genuinely affordable. If it only works when everything goes right, borrow less or choose a more flexible structure. Our cash flow management guide and how to forecast cash flow walk through building the underlying figures.

Matching the facility to the answer

Once you know the monthly repayment your business can sustain, the facility almost chooses itself. If your comfortable figure is modest but your need is short-lived, a short-term loan keeps the total cost down. If your cash gaps repeat unpredictably, a revolving line lets you draw and repay so you only pay for what you use — often the more affordable shape in practice.

Credicorp lends to UK limited companies on company affordability, with no personal guarantee, so the calculation stays focused on what the business can sustain rather than what you can personally pledge. When you have your number, you can explore our business loans, consider Credicorp Flex, or register to apply. This page is educational, not financial advice.