How to calculate how much your bakery can get in business financing

Unless your bakery’s balance sheet contains many high-value assets that you can liquidate for additional capital, you will eventually find yourself looking for financing at some point. Whether you need money to start a new bakery or to expand your existing bakery, small business loans can help.

Depending on the lender and the type of loan you apply for, you can borrow anywhere from $5,000 to over $5 million. Lenders will first determine the level of risk they face before settling on a number by assessing your cash flow, business history and credit ratings.

If you’re looking to apply for business financing and wondering how much your business can potentially get, read on.

How much does each type of business loan offer?

Each type of business loan is designed for different business needs. Along with this, the maximum loan amount offered by each financing option may also vary. Here is a breakdown of the different loan amount ranges offered by each business financing option.

1. Bank loans

Loan range: $100,000 to $5 million

Bank loans are one of the best financing options for small businesses, as banks typically offer higher loan amounts and affordable rates. They also have a longer repayment term than alternative loans.

However, business owners must overcome one caveat. They must meet potentially strict eligibility criteria. Although it may be difficult, qualifying for a bank loan will net you between $100,000 and $5 million. Banks generally do not handle lower loan amounts because the cost of underwriting and servicing the loan can be high, which may not be worth it to them.

The latest estimate of the amount of bank loans was $493,000 for large banks, while smaller banks lent an average of $146,000.

2. Term Loans

Loan range: $5,000 to $5 million

Term loans are granted in the form of a lump sum and repaid within a specified period. It is one of the most common types of loans that companies usually apply for, as you can use the proceeds for any business venture.

Term loans can be categorized as short term, medium term or long term. Here’s how much your bakery can qualify for each type:

  • Short-term loan: $5,000 to $50,000
  • Medium/intermediate term loan: $50,000 to $100,000
  • Long-term loan: $100,000 to $5 million

The average size for medium-term loans is $110,000 and $20,000 for short-term loans. There is currently no data available for long-term loans.

3. SBA Loans

Loan range: up to $5 million

SBA loans are government guaranteed loans available to small businesses. Although participating lenders (private finance institutions or community lenders) underwrite the loan, the federal government guarantees up to 85% of the principal amount. They are extremely difficult to qualify. but once you are approved, you can enjoy high loan amounts at very affordable rates.

There are several types of SBA loans, but the most common are SBA 7(a) and SBA CDC/504 loans. With both loans, businesses can receive financing of up to $5 million. The average SBA loan amount is $107,000.

4. Equipment financing

Loan range: 85% to 100% of total equipment cost

Equipment financing is a common financing option in bakeries because it specifically finances expensive equipment purchases, such as ovens and freezers. Because it is a self-secured loan, equipment financing usually has high financing amounts. Most of the time, companies can finance 80% of the total value of the equipment. It is also not uncommon for lenders to finance 100% of the total value of the equipment.

5. Commercial lines of credit

Loan range: $10,000 to $1 million

Business lines of credit provide bakeries with a line of credit with a set credit limit. Business owners can withdraw any amount from the line of credit when needed and repay the same amount plus interest.

Typically, businesses can qualify between $10,000 and $1 million with an average of $22,000. Bakers can negotiate the credit limit once they have established a good repayment record (i.e. repay on time and in full).

6. Microcredits

Loan range: $500 to $50,000

As the name suggests, microloans are smaller loans designed to meet any short-term business needs. Generally, companies can receive between $500 and $50,000 in funding. The average amount of microloans is around $13,000. Although less than the maximum amount, it is still a great option for bakeries that need additional capital to invest in supplies, equipment, and other baking needs.

Factors that affect how much you can borrow

The combination of factors described below will also affect the loan amount you will qualify for. Here’s how.

1. Credit score

Credit scores act as a measure of your creditworthiness. Essentially, the higher your credit score, the less risk you present to lenders. Businesses with lower credit ratings are generally considered high risk, so they are less likely to qualify for higher loan amounts.

2. Cash flow

Lenders will look at your cash flow to determine if you will be able to repay the loan after your business expenses. The more money you bring in each month or year, the better your chances of securing high funding amounts. Depending on the lender, your income must be at least ten times the estimated loan amount if you apply for an unsecured loan.

3. Time spent in business

Thousands of businesses fail every year, including small start-up bakeries. Naturally, lenders want to lend to businesses with high potential for success. If you’ve been in the industry for more than two years, it gives lenders the impression that you’re doing something right. On the other hand, any number lower than this can affect your chances of getting approved for a high loan amount.

4. Guarantee or deposit

Collateral is any asset (business or personal) used as collateral for a loan. It can be real estate, equipment, inventory or high value assets. The lender can seize the asset to pay the remainder of the loan if the business defaults. Although it is possible to obtain a loan without the guarantee, you will not be able to qualify for a higher loan amount and you may have to pay a higher interest rate.

In other cases, the lender may not ask for collateral but may require a down payment. It proves that you are serious about paying back the money. Generally, the larger your down payment, the larger the amount lenders will be willing to offer.

5. Type of industry

Lenders may also ask you what industry your business is in. If it is considered high risk (i.e. service business), socially unacceptable, or with unstable cash flow, lenders might be hesitant to lend to you. If they do, they will not be able to offer a higher loan amount.

The essential

Knowing exactly how much you can get from lenders will depend on several factors. It’s best to contact the lender directly so they can assess your business and give you an estimate of how much you can borrow based on your credentials.

It is important to note that interest rates vary from lender to lender. Be sure to calculate loan repayments first to find out if you can afford the repayments. If possible, get quotes from different lenders so you can compare costs and get the best deal for your business.


About the Author

Matthew Gillman is a business finance expert with over a decade of commercial lending experience. He is the founder and CEO of SME Compass, a specialty finance company providing training and financing options to business owners.

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