Business Finance – how much can I borrow?
In Planning growth, Raising finance, Rapidly scaling - 9 months ago - 4 min
Business Finance – how much can I borrow?
Guest Author: Funding Options
When looking to borrow money to take your business to the next level, you may wonder how much you will be able to get. There are a few ways that lenders decide how much they’re prepared to lend to you — and the product you choose is just as important as the lender you’re dealing with. The amount released by lenders will depend on the type of funding requested, and will always require a legitimate business need before being released.
The amount you can borrow depends on a lot of things, but the best starting point to consider is security. If your business owns valuable assets such as property, machinery, invoices or vehicles, you can use these items to raise money, because with security available, the lender knows they can sell the item to recover costs in the event that you can’t repay the loan.
However, because secured loans are based on tangible assets like these, the amount you can borrow is directly related to the resale value of the asset. Depending on the item involved, you may be able to raise between 50% and 75% of its resale value, which means machinery worth £30,000 might make you eligible for a loan between £15,000 and £22,500.
Different lenders will have different requirements for the types of assets they accept, but a good rule of thumb is that the asset must hold its value well and needs to be critical for the business’s daily operations.
If you do not have security available, or you’d rather not put it on the line, you may be able to get an unsecured loan. These don’t use any assets, but instead use your trading history to determine affordability.
With unsecured loans, there are no assets involved that the lender can sell if things go wrong, which means you need to do more to make them confident in lending to you. Without any security in the background, they’ll be looking for at least a couple of years of trading history, predictable revenues, good profits and cash generation.
For unsecured loans particularly, the most important factor is affordability. The lender wants to see evidence that you can comfortably repay a loan, and for this reason they often consider loan amounts as a percentage of turnover. For example, if your turnover last year was £200,000, you won’t be able to get a loan for that amount — but a loan of £10,000 sounds a lot more reasonable. A good rule of thumb to bear in mind is that lenders usually won’t be willing to lend more than 10–15% of your annual turnover, because otherwise the margin of affordability is too small.
One other important consideration with unsecured loans is that it’s quite likely you’ll be asked for a personal guarantee. This means that if your business can’t pay, you’ll be personally liable. You should think very carefully and get professional advice before making this commitment, because it means your personal assets are at stake if your business doesn’t do as well as planned.
Secured and unsecured loans are suitable for a whole range of different industries, but if you don’t have assets or a strong enough business track record to get them, you might look at the other options available. Alternative finance is incredibly diverse in 2017, and there are options out there to suit a wide variety of sectors that are difficult for the mainstream lenders to fund.
For example, shops and cafés can find it hard to borrow money because they don’t have many assets and their revenues are inconsistent. For these types of businesses, it’s possible to get funding based on card machine sales, called a merchant cash advance. With these, the lender taps into your sales data, and if you’re eligible you can borrow around one month’s turnover.
Overall, whilst it is useful to have an understanding of the debt capacity of your business, loans should be used to serve legitimate business needs rather than maximising the level of debt in your business. Fundamentally, how much you can borrow depends on affordability. If you’ve got a long history of strong profits and you’re looking to borrow one month’s turnover, you should have a good chance of raising the money. On the other hand, if you’re making a loss or you’re aiming to borrow more money than your business generates in a year, it’s much less likely you’ll be successful.
Finally, the value of any security involved plays a big part in how much you’re eligible for — but even with secured loans, lenders will still want to see evidence that you can afford the repayments.
If debt finance is not for you, read about other fundraising options in our latest articles. Or if you’re thinking about raising investment and want to understand your options, get some free guidance from one of our team today on 08081 722350 or drop us an email: G.Enquiries@uk.gt.com