When you are running a SME business, there will often be barriers to overcome or goals to reach that just can’t be done based on your cashflow. A business loan can prove incredibly important in empowering you to meet your financial objectives in these instances.
However, it’s not as simple as heading to the bank and asking for as much as you want when it comes to an external loan.
When seeking funding, you should have a good understanding of the figure for how much money you need to fill whatever financial gap you face. Even with a cash flow prediction of how much money you need and why, you might find that some lenders simply aren’t willing to offer you the total amount you want.
Business loan sizes can vary from ten of thousands to hundreds of thousands. Not every enterprise will receive the same figure. Many factors determine what loan size you can get, some of which are out of your control.
Below, we have listed the various considerations that may impact the amount you can borrow via a loan to help you understand what amount you might expect to walk away with.
Your business
The most significant thing that will impact what size loan you can expect to receive is your business. A lender will assess you against a range of criteria that they will use to determine how ‘risky’ you are to loan money to. The riskier you are deemed to be, the less funding you are likely to be offered.
The criteria a lender uses to review you will stem from your answers during the application process. Common factors they consider include the size of your company, financial history, credit score, and banking performance.
They will also want to know why you need the money and how you intend to use it. You’ll often be expected to provide supporting documentation which showcases your capacity to handle money so that the lender is assured that you will repay any money they lend you.
If you are in a strong financial position, with a healthy credit score, good banking performance and a robust plan for the use of funds, you are more likely to be offered a loan at more preferential terms. If you are in a less stable position, you might be offered a smaller amount at relatively penal terms.
Security
Another factor that affects how much capital you are offered in a loan is what security you offer to support the loan. Many lenders ask for security to protect the loan in the event that the business defaults on the loan repayments, usually in the form of assets or a personal guarantee from a UK homeowner.
The more assets you have available as security, the more collateral a lender will have to recoup their money if something goes wrong – meaning they’re more likely to allow you to borrow higher figures.
If you do not have anything to offer in the way of assets and don’t wish to sign a personal guarantee, it will limit the amount of money a lender is willing to offer you as they try to protect themselves against the risk of you defaulting on payments.
It is possible to get unsecured loans for non-UK homeowners, though they tend to be subject to high-interest rates to offset the lack of collateral and offer smaller amounts than their comparatively secured counterparts.
Affordability
By taking out a business loan, you agree to repay the full amount (plus interest), by way of regular monthly instalments over a fit term. You need to meet those repayments consistently without placing too much pressure on your cash flow. Due to this, affordability is a crucial consideration when a lender is offering you money.
Most lenders will ask for information about your financial commitments to determine what you can afford, this will be verified by viewing your bank statements. You need to ensure that you have sufficient cash inflows to exceed the loan repayments together with your other commitments to ensure that your business can still operate. The lender has a duty of care to not give you more money than you can afford to pay back, as this might place your business in further debt. It’s also not in their best interest as it leaves them potentially unable to get their funds back.
When asking for funding, be sure to do the maths beforehand and work out how much you can roughly afford each month. You should also give yourself room for manoeuvre so that you can still meet repayments even if your situation should change. By doing this, you will only get a loan at a size you can afford.
The lender
Different lenders will offer differing amounts of funding depending on your circumstances. They’ll also each have their own assessment criteria, so what you might be provided from one source may not be the same as another.
Commercial finance brokers have access to a more diverse range of lenders, allowing them to obtain a broader range of offers that suit the needs of more businesses.
The exact figure a lender will offer you will be tailored to you using the factors already outlined above.
Due to this, it’s often worth shopping around different lenders to find out who can offer you the best loan to fit your needs. This is especially important if you find yourself struggling to access finance, such as if you don’t have security or are seen as ‘high risk’.
The type of loan
Finally, funding amounts can depend on the type of loan you are taking out. Traditional loans more commonly offer larger sums of capital, which you repay over months or even years.
There are other forms of debt funding available, such as trade or invoice finance, that can be used as short-term solutions. These can offer you substantial funds using your supplier or customer invoices which you repay in a shorter timeframe. One benefit is that you can often access funding quickly and potentially at lower rates than a commercial loan – but with a funding line that flexes as your business grows or detracts, which might not suit everyone.
If a traditional loan doesn’t quite fit your needs, it is worth considering the alternative forms of debt funding as you might unearth another option that suits your goals better and enables you to get the amounts that you need.
Get advice
Deciding to take out a loan can be nerve-wracking, but it can dramatically boost your business’s potential and resilience when used correctly. However, it’s fundamental to find a loan that fits your needs – which means identifying the right solution.
When shopping for loans, it’s essential to be realistic. As much as we would like to get what we ask for, no questions asked, there are many considerations lenders must make to protect their interests and yours. Due to this, you might find what you’re being offered doesn’t always match your expectations.
Understanding the factors that affect your loan offerings will make it easier to acknowledge the impact for you and find the best possible solution. Take the time to research and speak to different lenders to find out how their offers vary. This will give you options to reflect on until you determine which is the most beneficial for your goals.
If you need help in sourcing a loan that suits your requirements, we can help. Our team of advisors can take you through the diverse range of solutions currently on the market and help to select one that works for your unique situation.
We can also put you in touch with relevant contacts who can take you onto the next stage of your funding journey.