If you’re looking to borrow money to fund your business, be it in the form of short term cash flow, longer term expansion plans or to finance some new equipment or machinery, the main question on your mind will be ‘how much can my business borrow?’.
There is no simple answer to that question because, much like with personal finance, it depends heavily on your business’ credit history and past financial performance. That being said, you can generally start to gauge an idea of how much you might be able to borrow by getting a better understanding of your borrowing capacity and understanding exactly what lenders base their decisions on.
At Aurora Capital, we work with a wide range of lenders and businesses, working to find the perfect match to suit every need. As part of our brokerage service, we routinely factor in borrowing capacity and seek to help businesses understand the factors that could influence their finance applications.
With this in mind, we’ve put together this article explaining how much you could be entitled to borrow for your business, as well as how you can better your chances of getting approved for the loan you want.
Understanding your business borrowing capacity
Firstly, it’s important to understand your business’ borrowing capacity. Borrowing capacity isn’t just about how much money your company could get from lenders, but also how much you should be borrowing. For example, you might have the ability to borrow £200,000, but it might be advisable that you only borrow £130,000 based on how much you can afford to pay on a monthly basis. This is to prevent you from taking out more money than you can reasonably pay back and afford without affecting your cash flow even further.
Some lenders might agree to let you borrow up to 40% of your annual turnover, but whether you should borrow that much is another question altogether. Borrowing capacity is all about borrowing sustainable and viable amounts of money that you can pay back, not just in the short term, but in the long term, too.
What factors impact how much I can borrow for my business?
So, what exactly affects how much you can borrow for your business? Well, there are six main factors lenders will look at. These aren’t the only things that can influence a decision, and not all of them are relevant to every type of business finance product, but they are things that most lenders will want to look at to determine if lending to you is viable on paper.
Revenue and Profit
The first thing lenders will look at when determining how much you can borrow for your business is your revenue. It’s common practice for lending companies to give you a set multiplication of your annual turnover. As mentioned, some lenders will let you borrow up to 40% of annual turnover, however if you are a younger business, the maximum loan may be closer to 1.5x your monthly revenue. Another key factor here is that your turnover is growing or at least consistent over the last 6 months to evidence that there are not any concerns to the lender.
Some lenders stipulate that your business must not be in financial difficulty before they will lend to you, but others aren’t quite so strict. That being said, it’s natural that the more profitable your business is, the higher your chance of getting approved for a loan and the more you can borrow.
This is because the affordability increases. If you’re barely getting by, lenders will assume a loan is another overhead that you might not be able to comfortably afford, therefore, how much you can borrow for your business is reduced. However, sometimes, loans are used as catalysts for growth, in which case a business plan and projections may also be taken into consideration.
Current debts
Any existing debts will be taken into consideration to determine whether you can afford the debt you’re taking on. It’s often the case that businesses will refinance existing debt through a new loan with more favourable terms. If this is the case for you, a specific debt consolidation product may be the best option as, in this case, lenders expect you to have existing debts.
If you’re looking to refinance existing debts but aren’t sure what type of loan may be best, or what type of deals are out there, speak to us today.
Collateral
Having collateral to secure a business loan against can work in your favour, namely because the higher the value of the assets you have, the more lenders can recover if you default on payments, and therefore the more they’re willing to let you borrow for your business. Collateral can be property, vehicles, stock, or equipment, with some lenders even considering soft assets like computer software.
Certain types of loans, like secured business loans, require collateral to secure the loan against. On the other hand, unsecured business loans don’t require collateral, but because of this, the risk to the lender is increased, therefore, the amount you can borrow is less.
Newer businesses might not have collateral to secure a loan against, meaning an unsecured loan is the only viable option, but even then, a personal guarantee is typically required.
Personal guarantee
Personal guarantees are often implemented when a lender has no property or assets to secure the loan against. In the event your business can’t pay the loan back and there’s no collateral to recover funds from, a personal guarantee gives lenders additional security on their investment because you (or another company director) will be personally liable to pay the debt. The strength of your guarantee will be assessed by lenders, so being a homeowner is a massive plus.
Credit score
Like a person, your business will have its own credit score, and just like when you’re trying to get personal finance, your credit score will be checked for business finance applications. It goes without saying that the better your credit score, the more you can borrow and the better your chances of getting approved. However, not every business has a good credit score, especially newer businesses.
Credit scores take time to build up and can generally be built by taking out credit and showing that you’re able to pay it off. This is why a low credit score isn’t necessarily a sticking point for getting credit (though it may mean you can’t borrow quite as much as you’d hoped).
At Aurora Capital, we work with a range of lenders who support businesses with adverse credit. Speak to us today to find out more.
Down payment
If you’re looking to finance a product or equipment, being able to pay a down payment will not only get you more favourable terms, but it will increase how much finance you can have. This is particularly the case with asset finance. Where possible, always try to pay a down payment.
Your financing options
Asset finance
Asset finance doesn’t tend to have a specific limit because of the fluctuation in the price of goods; however, it generally starts from £1,000 upwards. You have several options when it comes to financing assets, with choosing a private lender or going direct through the manufacturer being the most common options.
At Aurora Capital, we work with a wide range of asset finance lenders and can help you find the right lender for your needs.
Unsecured Business Loans
There are over 50 lenders that offer unsecured business loans, so each lender has a slightly different way of calculating how much you can borrow. However, we can break this down into 3 categories:
- Turnover – Some lenders will offer up to 40% of your annual turnover in your last filed accounts.
- Turnover – Other lenders will look to lend up to 1.5x your average monthly turnover in the last 6 months.
- EBITDA – Lenders will also look at your EBITDA figure, which is your net profit + any interest payments you have made in the last 12 months + corporation tax + depreciation + amortisation, and lend up to 3x this figure.
We can review all of the available lenders and decide which option may work best for your business.
Secured Business Loans
Secured business loans are based on the available equity in your property or properties that you are willing to place a charge on. The amount you can borrow is based on a loan to value calculation and the maximum any lender can offer is up to 75%.
For example, if you have a property that is worth £500k and has a mortgage of £200k, the maximum you can borrow would be £175k. This worked out by calculating 70% of the property value and then subtracting any existing mortgages or charges against the property.
Merchant Cash Advance
An MCA is a product that is tied to your credit/debit card takings and each lender can offer up to 150% of your monthly average card sales. The longer you have been trading the more likely you are to be able to raise the maximum level.
For example, if you have been trading for 10 years and your card sales are £50,000 per month, you can look to borrow up to 150% of this; £75,000.
However, if you have only been trading for 12 – 24 months, you are more likely to be offered something closer to 100% of your monthly card sales.
Business borrowing with Aurora Capital
There are so many finance options for businesses, and it can be hard to know exactly which one to pick or how much money to ask for. At Aurora Capital, our finance experts can help you determine how much your business could borrow and which lenders would be best placed to do it. Contact us today to find out more.