Larger Business Loans
Larger Business Loans
Established companies that need to finance large investments will usually use a combination of debt funding and their own cash balances. Larger loans or bond issues will need to be secured against the assets of the business and, in some cases, against the personal assets of the directors as well. They may also carry covenants that the borrower must keep within, for example a minimum ratio of earnings to interest payments.
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The Informed Funding two-minute guide: Larger Business Loans
- What types of funding should I consider?
The precise type of debt that the company needs will depend on what the money is to be used for. If the plan is to purchase fixed assets, including premises or equipment, the money may be most easily raised via asset finance or a commercial mortgage secured on the assets that are being purchased. Similarly, funding for the acquisition of another business may be secured, at least in part, against the value of the assets that are to be acquired. Where the borrowing is intended to finance expansion by hiring additional staff, the existing assets of the business (and directors) will be needed to provide security for the loan. Irrespective of the precise purpose of the loan, however, lenders will expect to see the company put up a decent proportion of the cost of the project from its own resources and will require a detailed and robust business plan with cash flow projections over several years to demonstrate that the project in question will provide a sufficient return to cover the costs of the debt that is to be raised.
- What about shorter term lending?
Finance to buy stock can be secured against the value of the stock but usually only at a relatively low percentage of its value, while borrowing to finance working capital requirements is most frequently secured against a combination of the business’s existing assets along with the value of its “trade receivables”, the sums it has outstanding in invoices for goods and services provided.
- What does this type of borrowing cost?
Secured term loans are generally less expensive than unsecured borrowing and can frequently be accessed at rates of less than 10% per annum. This will vary according to whether the loan is to be repaid in a mixture of interest and principal throughout the term or whether it will be interest-only, with the principal repaid at the end, as is usually the case with loans to fund property developments, for example. Interest-only loans will tend to have higher rates than “amortising” loans.
- What information will the lender require?
Borrowers will need to provide a full set of financial information including historic and recent management accounts, a recent balance sheet, a debtor list and, in cases where the loan is being taken out to fund expansion, a robust and well-presented business plan that includes cash flow projections through the term of the loan. Directors are also likely to have to provide details of their personal assets including properties and financial resources so that these can be used as security alongside the business’s assets.
- What fees should I expect?
Aside from the interest charges, you should expect to pay an arrangement fee when taking out a loan that will typically be up to 5% of the value.
- Need to know:
- The key to success in funding larger investment projects is to have high-quality financial information on your company that is well presented and can be provided quickly to prospective lenders, along with a detailed business plan and cash flow projections to back up your case for borrowing.
- The more the business is able to contribute to the cost of the investment project from its own resources, the more comfortable lenders will be to share the risk by providing debt finance.
- The total amount secured and the nature of security given must be disclosed in the financial statements as must the details of any personal guarantees given by the directors of the company. If filing abbreviated accounts, only the former need be disclosed.
- Loan financing will increase the liabilities of the company and will increase the financial gearing. This may make securing future borrowing more difficult. However, it will be clear on the face of the balance sheet how much the company is liable to repay within one year, and in greater than one year.
- This type of lending may come with covenant restrictions attached which may trigger early repayment if breached and may also limit future activities of the business.
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