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Business Loan Borrowing: How Much Is Right for Me?

Read how you could use either small or large loans to achieve specific outcomes within your small business.
Business Loan Borrowing: How Much Is Right for Me?

Updated on 10/02/2021

If you’ve decided that a business loan could be an attractive finance option for your small business, then you may well already be looking into the details and determining exactly how much money your business needs to meet its objectives.

To help guide you in your research, this article will highlight some considerations that may help you reach a decision more quickly, and showcase some of the pros and cons associated with different lending volumes.

How much money does my business need?

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This is the first question you may want to ask yourself before comparing business loans. A good starting point here could be to identify which of the following three approaches best fit your business’ current financial goals:

  • Survival – you’re looking to break even, make ends meet and find stability with your cash flow.
  • Incremental growth – you’re in a fairly stable position with access to some emergency cash reserves and you’re looking to steadily grow your business.
  • Explosive growth – you’ve spotted an opportunity in the market, or found sudden success that has made your business leap forward.

With a good understanding of your business’ overarching goals, you could find yourself well positioned to start coming up with some projections for the next 12 months and beyond. When making these projections, it could be useful to identify the major pressure points you’re likely to run into, and map out where important cash injections will need to be made in order to facilitate your growth strategy.

From this activity, you should be able to come up with a vague idea of the total amount of money your business may need to meet its success criteria, and an understanding of when that money is likely to be required. Next, it could be useful to start thinking about lending options, and the terms you’ll need from a loan agreement.

How different lending volumes could impact your business

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Let’s take a look at some of the different applications, considerations and pitfalls associated with popular loan sizes.

A £500k business loan

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If your business is in a position where you’re looking to take out a £500,000 business loan, you’re may be preparing for a rather monumental event. Loans of this size can be used for purposes such as acquiring other businesses, (perhaps either rivals or acquisitions intended to allow you to enter new markets) and are no small undertaking.

With a £500k loan, you may find that the lender requires some form of business plan from you in order to help them make a risk assessment when determining the terms of a lending agreement. If you’re able to provide one, you may find that you have access to slightly better interest rates and repayment conditions than you’d otherwise find on a smaller loan – as the provider may have confidence in your ability to repay the money.

One noteworthy pitfall when considering lending larger sums of money is that the repercussions for a SME could potentially be greater if the business is unable to repay the borrowed cash. That’s why it may be wise to really scrutinise your business plans, create detailed forecasts and ensure the plan for spending borrowed money is watertight before signing a lending agreement.

A £100k business loan

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£100,000 is no small amount of money to lend, either. With this sort of investment may come the power to make significant capital purchases that could open doors for your business if you’ve spotted an opportunity for growth.

A local coffee shop that is moving from strength to strength, for example, could use a £100k loan to expand its’ premises or acquire new, state-of-the-art commercial coffee machines that enable a faster, smoother service.

Again, with a great loan comes great responsibility so it’s important that borrowers are confident in their ability to repay any borrowed money based on their business plan (including any contingency plans).

A £25k business loan

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An example of the sort of growth activity you could undertake with a £25,000 business loan is expanding the channels your small business operates in. That’s what one of our clients, Piglet’s Pantry, found - owner Joanne used the money, in part, to allow her to focus on a digital expansion to take her pie business to the next level.

When a business is finding success with its core offering, a business loan can sometimes buy (often busy) SME owners enough time to dedicate to growing the business in a more holistic way, whether that involves bringing an extra pair of hands on board to lighten the load or providing the raw capital needed to outsource development work.

With smaller lending volumes, it may be cheaper for businesses to select shorter repayment periods when comparing business loans from different lenders. That’s because the interest rates could be more favourable, and so you could find that they’re a little less flexible than, say, a £500k loan.

Ensuring you’re able to repay this amount is essential, but the calculations and projections required to fully understand how these smaller loan amounts will be paid and reused could be a little easier than what is required of a larger loan.

A £10k business loan

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Many SMEs that consider a business loan of £10,000 are doing so for cash flow-oriented purposes. Such an amount can serve as a healthy buffer to ensure SMEs are able to continue to pay their staff, and meet other costs where appropriate.

£10k loans can enable a business to be responsive if, for example, it finds itself needing to buy a large amount of stock from its suppliers to meet a sudden order. There’s also seasonality to consider, as a smaller loan amount could support a business through a natural seasonal dip it faces on an annual basis, when demand is low.

There are a range of pros and cons associated with each lending volume, but one consideration that may be worth making is around time. With many lenders, the more you’re looking to borrow, the more steps and considerations you may have to go through. This may be why many SMEs opt for a slower, steadier growth strategy that avoids the added pressure, planning and staff structure that you may find with, for example, a £1m loan.

Ultimately, when such vast sums of money are being transferred, it’s crucial for all parties to ensure that loans are being borrowed responsibly, without jeopardising the financial security of the borrower or the loan provider in the future. On this note, here are a few suggestions to help ease the process of finding the right loan.

Which lending considerations should I make before taking out a loan?

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Our small business loans guide explains how a business loan works in more depth, but the main elements of a lending agreement you’ll need to be aware of before signing are:

The total amount borrowed

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How much money do you need? You’ll need to understand how much money you’re borrowing, and in what phases that money is to be paid to you by the lender. Most loans are either paid to borrowers as a lump sum, or as a set of instalments over a fixed timeframe.

The repayment period

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To create a proper cash flow forecast and minimise the risk of over-spending or over-borrowing, you’ll need to understand:

  • How frequently you are required to repay your business loan.
  • How much you’re repaying within each instalment.
  • Over what time frame the full loan amount must be repaid.

The terms and conditions

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What happens if your business requires more money part way through a lending agreement? What options are there for you if you aren’t able to meet your scheduled repayments?

These are the kinds of questions that the terms and conditions of a lending agreement should answer, so knowing in advance what level of flexibility you’ll need from a loan could help you speed up your search for the right loan. As always, make sure you do your research thoroughly before signing on the dotted line.

Eligibility

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Each lender will specify different eligibility criteria that determines who they’re comfortable lending to. They may require certain documentation to be provided or transparency with your credit history, all to help assess your credibility as a borrower.

If you’re no stranger to the topics discussed in this article and you’re keen to get stuck into the process of exploring your loan options, you may want to try out our business loan calculator to find out what your repayments could look like when taking out an Esme business loan. Or, read more about what applying for a business loan involves.

Our eligibility is as follows: you must be a sole trader or Director of a UK Limited company registered with Companies House that has been actively trading for at least 3 years. You must have a turnover of £50,000 or more and a track record of making a profit. The minimum age for applying is 18 years old and you need to be a UK resident and a homeowner.

Disclaimer

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This has been prepared by Esme Loans Limited for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.

Esme Loans Limited makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.

Esme Loans Limited accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

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