How Much Can I Borrow? Understanding Commercial Loan Sizing
This is the question at the center of every commercial financing
conversation. And the honest answer is: not whatever you want, and not
what your neighbor said they borrowed.
The amount a commercial lender will loan is determined by specific
formulas. Those formulas exist for good reasons — they’re designed to
ensure the loan can be repaid. Understanding them puts you in a position
to have a productive conversation with a lender, rather than being
caught off guard by a lower-than-expected loan amount.
Let me break it down in plain English.
The Two Governors: DSCR and LTV
Commercial loan sizing is controlled by two primary metrics, and
they work simultaneously. You’re limited by whichever one produces the
lower number.
DSCR (Debt Service Coverage Ratio) controls
how much you can borrow based on income. It asks: does this business or
property generate enough cash to make the loan payments?
The formula: Net Operating Income (NOI) ÷ Annual Debt Service (total loan payments per year)
A lender who requires a 1.25x DSCR means they want the income to
cover the payment by 25%. If your property or business generates
$125,000 per year in net income, the maximum annual debt service is
$100,000 — which constrains how large a loan you can take.
LTV (Loan-to-Value) controls
how much you can borrow based on collateral. It asks: if we have to
sell the collateral to recover the loan, will the collateral cover it?
The formula: Loan Amount ÷ Appraised Collateral Value
A lender who works at 70% LTV on a $1 million property will loan
$700,000. Period. No matter how strong the income is, they won’t go
above $700,000 if that’s their LTV cap.
Here’s how they interact: if the DSCR math supports an $800,000
loan but the LTV cap is $700,000, you get $700,000. If the LTV math
supports a $700,000 loan but the DSCR math only supports $600,000, you
get $600,000. The lower number wins, always.
Advance Rates: How Asset-Based Lending Sizes Loans
For asset-based lending — factoring, revolving credit lines,
equipment-based loans — the sizing mechanism is the advance rate against
eligible collateral.
Accounts Receivable: Lenders
typically advance 70-90% of eligible A/R. “Eligible” means receivables
that are less than 90 days old, from creditworthy customers, and not
subject to disputes or concentration limits.
If you have $500,000 in eligible A/R and the advance rate is 85%,
your maximum borrowing is $425,000. If your A/R grows to $700,000 next
month, your availability grows to $595,000. This is what makes revolving
A/R facilities so powerful — they scale automatically with your
business.
Equipment: Equipment
lenders typically advance 70-90% of appraised or orderly liquidation
value (OLV). New equipment at full retail gets higher advance rates.
Older, specialized equipment gets lower advance rates because it’s
harder to liquidate.
Inventory: Inventory
advance rates are typically lower — 50-70% — because inventory is
harder to liquidate than A/R and its value is less predictable.
Real Estate: Advance
rates (LTV) on commercial real estate vary by property type: 65-80% for
stabilized income property, lower for land and transitional assets.
Understanding Concentration Limits
One thing that surprises borrowers when their A/R line is smaller than expected: concentration limits.
Most A/R lenders cap how much of the borrowing base can come from
any single customer — typically 20-25% of total eligible A/R. The
reasoning: if one large customer represents 80% of your A/R and they go
bankrupt, your collateral largely disappears.
If one customer owes you $400,000 out of $500,000 total A/R, the
concentration limit might reduce your eligible A/R from $500,000 to
$300,000 (assuming a 20% concentration limit, only $60,000-$80,000 from
that one customer would count as eligible). This is an important number
to understand before you count on a specific borrowing availability.
How to Calculate What You’re Likely to Get: A Practical Framework
Let me walk through a practical example for a commercial real
estate loan, because it illustrates how these constraints interact.
You want to purchase a small office building for $1,000,000.
The building generates $110,000 per year in gross rents. After
vacancy (5%), operating expenses (30%), and property management (8%),
the NOI is approximately $63,000.
The lender requires 1.25x DSCR and offers a 25-year amortization at 7%.
To find the maximum loan supportable by income: if annual debt
service must be no more than $63,000 ÷ 1.25 = $50,400, what loan
produces $50,400 per year at 7% over 25 years? That’s approximately
$670,000.
The lender also caps LTV at 75%: 75% × $1,000,000 = $750,000.
Both constraints: DSCR supports $670,000; LTV supports $750,000. The binding constraint is DSCR. Maximum loan: $670,000.
Down payment needed: $330,000.
Now you know what you’re working with before you make an offer or submit an application.
How to Increase Your Borrowing Capacity
If the loan sizing math doesn’t produce the number you need, there are real ways to improve it — some in your control, some not.
Increase the income (NOI). For
real estate: raise rents, reduce vacancies, cut operating expenses, add
ancillary income streams. A property worth $1 million today might
support $50,000 more in debt service after improvements.
Extend the loan term. Longer
amortization = lower annual debt service = more supportable loan. A
30-year amortization supports a larger loan than a 20-year amortization
at the same rate and same income.
Use mezzanine or subordinate debt. When
senior debt sizing is constrained, a mezzanine tranche can bring total
financing to 85% LTV. You’re taking on more total debt cost, but you’re
getting access to the capital.
Improve the collateral. Better
collateral — newer equipment, higher-quality A/R, well-maintained real
estate — produces higher advance rates and higher LTV.
Add more collateral. Cross-collateralization — pledging additional assets you own — can support a larger loan than any single asset alone.
Work with someone who has broad market access. Different
lenders have different DSCR requirements, different LTV limits, and
different advance rates. A lender who works at 1.20x DSCR vs. 1.30x DSCR
produces a meaningfully different maximum loan on the same property.
This is one reason having access to 65+ lenders matters — the right
lender for your deal is the one whose parameters actually fit it.
When the Sizing Is Lower Than You Need: Access > Cost in Action
Sometimes the math simply doesn’t support the loan size you need
from any single source. When that happens, the answer is often a
creative capital stack rather than abandoning the deal.
A property that can support $670,000 in senior debt but needs
$850,000 total can potentially be structured with $670,000 in senior
debt plus seller financing, mezzanine debt, or equity partnership for
the remaining $180,000. The total cost of capital is higher — you’re
paying senior debt rates on the first $670,000 and mezzanine or equity
rates on the rest. But access to $850,000 beats access to $670,000 if
the deal requires $850,000 to close.
This is the access > cost principle in direct application. A
higher-cost capital stack that gets the deal done is better than a
theoretically cheaper single-source loan that leaves the deal
underfunded.
The Conversation to Have Before You Apply
Before you submit an application to any lender, run the math. Know
your DSCR. Know your LTV. Know your eligible collateral. Walk into the
conversation understanding what the deal can support, so you’re not
surprised by the number that comes back.
I run this analysis with every client before we go to market. Not
to discourage — but to make sure we’re approaching the right lenders
with the right expectations and the right deal structure.
John R. Weaver, CEO
W. Reynolds Commercial Capital, Inc.
(325) 440-5820
Equipment financing: reynoldscomcap.com/commercial-financing/equipment-financing/
Working capital: reynoldscomcap.com/commercial-financing/accounts-receivable/
Let’s run the numbers on your deal before you apply anywhere.
Knowing what the math supports going in changes the entire conversation.
Disclaimer
While this article accurately reflects the combined
capabilities of all lenders and technology partners with whom W.
Reynolds Commercial Capital, LLC has a relationship, not every lender
will have all of these capabilities. Not all lenders will have the same
services, technology platforms, pricing structures, or program features,
and this article in no way guarantees the availability of any specific
feature, advance rate, same-day funding, 24/7 portal access, proprietary
early-pay software, insurance-backed protection, fuel card integration,
or any other service for any individual borrower or transaction.
All financial solutions are subject to credit review,
underwriting, due diligence, and final approval by the respective
funding partner. Actual terms, conditions, and availability may vary
based on the client, invoice quality, industry, collateral, and the
policies of the selected lender.
This article is provided for informational and educational
purposes only and does not constitute a commitment, offer, or guarantee
of funding or any particular terms.
For a no-obligation review of your business financing needs
and the options currently available through our network, please contact
us directly.
