Gross income vs. net income for bank business loans (The difference)

Does your business need more capital for inventory, equipment or scaling up your marketing growth strategy?

Are you in the market for a business loan, but not sure whether banks look at gross or net income? You are at the right place! That’s because in this article, we clearly explain how you can get a business loan by prioritizing gross or net income and what this really means.

Do banks look at gross or net income for business loans?
Of the two figures, gross income or net income, which is more likely to be the least risky for the bank, to ensure they get their money back? In order to answer this question and before the bank can actually lend you money, the bank will need more information, such as:

  • How many years has your business been earning this gross income?
  • How many years has your business been earning this net income?
  • Of this net income, what other expenses are there, such as the owner’s income, taxes, other liabilities, or partners?
  • What are the assets that can secure this loan, just in case the payments get missed?

Before we start talking about which metric is more important for getting a business loan, gross income or net income, let's begin by defining and explaining these terms:

Gross Income:

Gross income is income before fixed expenses, such as rent, utilities and advertising. This term refers to revenue from all sources minus the cost of goods sold (COGS).

For example, if your annual sales are $100,000, and you spent $20,000 on the goods or materials to achieve that sales figure, your gross income is $80,000.

Net Income:

Net income is the cash left over after your fixed expenses have been removed from your gross income.

Net income is calculated by first taking your total sales figure and subtracting the cost of goods sold (COGS) in order to find your gross income, and then subtracting all other expenses.

These expenses, such as bank fees, taxes, depreciation, interest, admin expenses. Collectively, these fixed expenses (not COGS) are often referred to as S,G&A, which stands for Sales, General and Administrative.

If your business earned a gross income of $80,000 last year, now it's time to subtract your fixed expenses (rent, interest, utilities, advertising, etc). Let’s say that total figure is $30,000.

Now subtract the total expenses from your gross income to calculate your net income (before tax). 

In this case, $80,000 minus $30,000 equals $50,000 in net income, before taxes

So, now the question is: Do banks look at gross or net income for business loans?

In this example, you have:

  • Gross income of $80,000, and 
  • Net income of $50,000 (before taxes).

What do banks loan money on?

As we answer that question, put yourself in the position of the bank.

All they care about is getting their money back and earning interest, in order to continue their business model. Their goal is to reduce risk.

Of these two figures, gross income and net income, which is most likely to ensure then lenders get their money back with interest? In order to answer this question, the bank will need a little more information, such as, 

  • What is the health of the business?
  • How long has the business been making sales?
  • How many years has your business been earning this gross income?
  • How many years has your business been earning this net income?
  • Of this net income, what other expenses are there, such as the owner’s income, taxes, other liabilities, or partners?
  • What are the assets that can secure this loan, just in case the payments get missed?
  • What is the credit worthiness of the borrower?

Which is more critical in terms of securing a business loan?

Most financial experts view net income as a business's ultimate indication of profitability. If this figure is positive and has been positive in the past, the chances of securing a business loan are relatively high. 

Banks and other lenders will want to know that you have a good handle on gross income vs. net income.

While other experts are of the view that, with a business loan, it's a similar process to that of a home mortgage, but the cash flow of the business replaces your personal income. 

And this is where another element is considered.  

You see, there is a different term for net income, as it relates to cash flow from the business, that is very important to lenders: It’s called EBITDA. 

EBITDA or Earnings Before Interest and Taxes plus Depreciation and Amortization is an extremely important measure when determining the true profitability, invest-ability and loan worthiness of a business.

For example, banks look at EBITDA and compare it to the loan payment. They want to know that the business is generating more cash flow (EBITDA) than the amount of the loan payments.

In short, you must focus on your net income and EBITDA to secure a business loan from a bank or any other market lender. This is because these two metrics truly reflect if your business will be able to repay the loan.

What income do banks look at for the self-employed?

Self-employed workers can face particular challenges when securing funding for their personal enterprises

Inconsistent income or lack of a steady paycheck can make lenders reluctant to provide funds, leading lenders to require more documentation to determine whether sole proprietors or self-employed workers can make their payments.

However, being self-employed doesn't mean getting a business or personal loan is impossible. From government programs to banks and online marketplaces, you still have many options to explore beyond traditional lenders.

  • Most lenders require minimum annual income as one eligibility criterion to grant self-employed loans. 
  • A net income below the set benchmark can lead to the rejection of a loan application. 
  • In addition, lenders generally put much emphasis on the business's profitability. 
  • They typically require the last three fiscal year's profit and loss statements and updated accounts to judge your financial position and performance for the self-employed. 
  • Sales and revenue act as the primary base for assessing the loan application.

From this, we conclude that the business should have an annual and monthly revenue above the limit set by the bank and other institutions, positive cash flows, and good net income to secure a business loan from a bank or any different lender.

This is why it is important to shop for the best banks and find the bank that fits your needs.

How much can you get for a business loan?

Now the question arises how much can you get for a business loan? 

Well, it depends. It depends upon the gross income, the net income, and EBITDA.

It depends upon:

  • The lender 
  • The type of financing 
  • The interest rate 
  • The length of the loan 
  • The credit worthiness of the borrower
  • The terms of the loan

As you can see, there are many, many variables that determine not only how much you can get for a business loan.

Generally, as a small business or self-employed, it may be possible for you to borrow anywhere from $1,000 to $5 million.  

And as your gross income, net income and EBITDA rise, this number can get much much larger reaching hundreds of millions of dollars or more. 

Here are a few different loan types and the maximum amount you can get from them:

Loan TypeLoan Range
SBA loansUp to $5 million
Bank loans$5000 to $5 million
Short-term online loans$5000 to $500,000
Business lines of credit$10,000 to $500,000
Microloan$500 to $10,000
Equipment FinancingUp to $500,000
Invoice factoring85% of unpaid invoices

The amount of loan varies on the factors such as what type of business you own, what kind of loan you want, and what lender you are choosing. 

Businesses that need a large loan should opt for SBA and large bank loans, whereas if you need a small business loan quickly, you should opt for small banks or online banks. 

Online business lenders generally have more flexible qualification requirements than traditional lenders. As a result, these loans are typically easier to qualify for, and faster to fund but keep in mind that the cost of borrowing is much higher. Indicative of more fees and higher interest rates.

Here is a table of different online loans and the maximum amounts you can get from them:

LenderMax AmountMin Credit ScoreAPR range
Kabbage- Line of credit$250,0006408-80%
OnDeck- Online term loan$100,00060029.90-97.30%
Credibility Capital- Online term loan$500,0006507.99-24.99%
Funding Circle- Online term loan$500,00066010.64-31.85%
Blueline- Line of credit$250,00062515.00-78.00%

We are not advocating that you go into debt without a sufficient plan to not only make the interest payments, but pay the loan back in full and have ample excess cash flow to reinvent into even more growth plans.

With that, the most important solution when needing more capital to fund your business and growth plans is first to build a strong and healthy gross income, followed by a healthy net income.

With these as the priority, banks and lenders will be beating down your door to lend you money and you will be able to pick and choose the bank that you want to work with and give you the best terms at the lowest rate.

Study the materials at StrategicMarketingPartner.com and your business will soon have great cash flow as a result of superior marketing!

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