How to check if your business can afford a loan

2 min read

Step 1Find your free cash

Step 2Calculate DSCR

Step 3Stress-test it

Step 1 — work out your free cash

Start with the cash your business reliably generates: operating profit, plus non-cash costs like depreciation, minus tax and any unavoidable commitments. Use recent management accounts, not last year's filed figures. This is the cash actually available to service new debt.

Step 2 — calculate your debt service cover

Divide that free cash by the annual repayments you are considering to get your debt service cover ratio. Aim for at least 1.25 — meaning you generate £1.25 of cash for every £1 of repayment. Below 1.0 means the business cannot currently service the debt from its cash. Use the affordability calculator to speed this up.

Step 3 — stress-test the repayment

Now ask what happens if things get harder: model a sales dip of 10–20% and check the repayment still fits. Real businesses have bad quarters; a repayment that only works in a perfect month is a trap. If the stressed case is tight, borrow less or spread the loan over a longer term.

Step 4 — right-size the loan

If the numbers are comfortable, you can apply with confidence. If they are tight, adjust: reduce the amount, extend the term to lower the monthly payment, or first improve cash flow by collecting overdue invoices. The goal is a repayment you would still make easily on a bad month.

Then apply with confidence

Running this check first means you apply for the right amount and avoid an unnecessary decline.

Credicorp lends to your company, not to you personally, and takes no personal guarantee. See indicative terms on business loans, or apply online in minutes.

See the affordability guide.

Frequently asked questions

What DSCR should I aim for before applying?

At least 1.25 is a sensible target — it shows the lender a cushion above the repayments. If you are below that, reduce the amount or extend the term before you apply.

Should I use profit or cash for affordability?

Cash. Profit can look healthy while money is locked in unpaid invoices or stock. Lenders assess the cash your business actually generates, so you should too.

How much should I stress-test by?

A 10–20% sales dip is a reasonable starting point. If the repayment still fits comfortably under that pressure, the loan is well-sized. If it does not, borrow less.