How will banks calculate my ability to repay debt?

I have been trading for about two and a half years and currently employ 19 people. However, we are at a tricky stage. I want to increase sales but in order to do so I will need to move to new premises, hire more staff and invest in more resources. The business is cash positive, but hasn’t always been, and I am wondering how big a loan the company would qualify for. Is there a particular model that the banks use to calculate your ability to repay a debt?

A. Andy Clayton of Secantor writes:

Before approaching your bank, a clear strategy and realistic business plan is essential. Establish monthly forecasts of cash, profit and the balance sheet for the foreseeable future, as well as what might happen if growth accelerates slower or faster than you expect. The better your forecasting record, the more likely it is the bank will support you. High gearing (the proportion of debt financing to total funding) is less appropriate if you cannot confidently predict future cashflow. A key test here is to ask yourself if you’d risk your own money. If not, don’t expect the bank to either.

Banks want to be confident you can repay the debt and interest. They will take a more strategic view and evaluate the management team. Normally they want your operating cash flows (before debt servicing) to cover interest costs by two times or more depending on the level of capital expenditure, tax and debt repayments.


Banks usually seek security for loans or an overdraft and will look for greater cover over the assets charged than lenders specialising in a particular field. So consider sales finance or other forms of asset-based lending against assets such as stock, plant and machinery or property. Many invoice finance providers will advance up to 80% of each invoice. Bank loans and overdrafts may also be available, typically requiring a floating charge on other assets and perhaps personal guarantees.

You may qualify for the Small Firms Loan Guarantee (SFLG) scheme, which solves this by providing lenders with a government guarantee covering 75% of the loan. SFLGs are available for loans of up to £250,000 for businesses under five years old.

Of course, before you seek funding, you should maximise your working capital and reduce the need for external finance.



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