How Much of a Business Loan Can I Get?
How Much of a Business Loan Can I Get? You may have just taken on a business venture, and now you’re looking for the finance to get it started. That’s where business loans come in. But how much can you borrow, and what are the means of getting them? This article will cover all of that, including the different types of loans available, such as equity funding loans or debt financing loans. It will cover the means needed to obtain such loans and how much you might be able to get.
What Loans are Available to Small Businesses?
There are various types of loans that you will be able to apply for. This includes funding for the business, such as a loan for working capital to assist a business’s cash flow. Considerable amounts can be borrowed in this way, and the terms of such loans usually involve using collateral (such as equipment or property) to secure them. If you’re considering taking out an equity or debt financing loan, perhaps you’ll have to provide collateral or guarantee your repayment (or at least the repayment of some portion of the loan). However, if you’re looking for money that can go towards expanding your business, you may find different options open to you.
There is also a wide range of bank loans and business credit facilities that you could look into. This can be in the form of business overdrafts for working capital, microfinance, or leasing finance if you’re looking to acquire equipment. You may have to have a decent sized balance in your business bank account before qualifying for an overdraft. Still, they provide various added benefits, including low-cost borrowing. These loans usually don’t require any collateral, and the interest rates tend to be relatively low.
Different Types of Funding
There are many options available for funding – there are even some government schemes available if you’re starting a new business. All businesses have different needs, so the funding available for a small business will differ from that for a large business. We’re not going to detail every type of funding available but rather touch upon the main types of loan you might consider if you’re looking for funding.
Equity Funding Loans
In the past, equity funding has typically been known as angel investment – and this is still an excellent way to obtain it. What’s more, you’ll be able to secure funding for up to 60% of your business. So instead of taking out a loan for, say, £25,000, you could borrow the exact amount and receive £15,000 of shares or “equity” in your business.
The problem is that you’re likely to run into issues with paying back all that money. There are pretty strict rules about who can participate in equity funding ventures and regulations regarding money laundering and security measures. Hence, it is not suitable for everyone. The funding is only likely to be available from a small number of investors and those in the know. Hence, it’s worth considering the consequences of providing your finances as collateral before deciding.
Debt Financing Loans
While equity funding loans are attractive for larger businesses, many smaller ones prefer debt financing loans as they have lower interest rates than equity funding loans. They also provide more flexible additional facilities such as interest-free periods or more extended repayment periods when compared to equity funding loans. Debt financing loans are better suited to businesses with a balance sheet value of under £2 million.
This type of financing is commonly known as business loans or line of credit (LOC) loans. What’s less well known is that the types of loans available may vary. Loan amounts can start from as little as £5,000 and go up to a business’ entire working capital requirements. These loans are available in “short term” packaging, with terms that may be as short as 12 months. The interest rates charged on these types of loans are usually quite competitive. On top of this, there is also flexibility when taking out an equity funding loan, so debt financing may be preferable, especially if you’re a business owner and still paying off your debts.
Equity Funding Loans
These are the most common type of financing that you’ll receive. They allow businesses to raise money based on their equity, and they lend up to 80% or 90% of their balance sheet value (depending on their size). This can mean that a business could borrow up to £1 million with an interest rate of only 10% (compared to 15-30% on many credit cards).
Equity funding loans can come in a wide variety of guises. The most common type is a share capital loan, where the business provides a loan to the lender and repays in shares of the business. Another type, the hybrid equity funding loan, takes this one step further. This provides the maximum interest but maintains control of the entity to grow to its full potential.
Business Overdrafts
As the name suggests, these are loans for working capital. Requirements typically include a minimum credit assessment of £5,000 and £200,000, though more significant limits exist. Overdrafts can come in various guises, including a single business overdraft or a multi-borrower business overdraft, which allows multiple businesses to be financed together by having one account as the overdraft provider. Interest rates will be in the 4-7% region and are charged annually (i.e., every twelve months). These loans are designed to be a short-term solution while businesses work on improving their cash flow.
What’s the Best Way to Get Funding?
While many different providers offer business financing, it’s essential to consider what’s best for you. For example, if you’re looking to expand your business, it might be your interest to obtain a loan from the government-backed Business Finance Company. This provides up to £10,000 of funding through its Small Business Growth Scheme.
It might be a better option than approaching a bank as they tend to charge higher rates and have strict lending criteria. The initial approval process is made more accessible with a business development agreement (BDA), giving banks greater flexibility in their lending policy and keeping them happy with the risk they are taking on.
How Much of a Business Loan Can I Get? To Conclude
No two businesses are the same, and the funding you receive will depend on the business sector that your business is in and several other factors. There’s no absolute ‘right’ or ‘wrong’ way to obtain funding. It would help if you looked into what suits your needs best and then took the next steps towards obtaining funding.
Funding options discuss obtaining business loans with bad credit in more detail here.
Other useful links about loans:
Enterprise Finance Guarantees Loans
Asset-Based Lending
Bridging Loans
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