Q: How much personal equity will I need in order to secure funding from a high street bank?
Oct 27 2009
Answered by: Clive Lewis Ask a question
You do not mention how much you seek to borrow or what is the purpose of the finance. Are you starting a new business or an existing business requiring working capital or finance to buy an asset?
If you are seeking a loan which comes within the normal range of a personal loan (this will vary from bank to bank but is usually under £20,000) the decision will be taken on your credit score and general conduct of your account with the bank (assuming you are applying to the one which you already have an account with).
Greater sums will largely also depend upon the purpose of the loan. If it is to buy an asset, the bank will look at alternatives such as hire purchase/leasing (for equipment or motor vehicles) or a mortgage (for a property). These require differing levels of deposits. Hire purchase/leasing may only require an initial payment of the first instalment whereas a commercial mortgage on business premises will usually be offered up to 70 per cent of the asset valuation.
For working capital the bank will more than likely suggest invoice factoring or discounting, whereby money is advanced against a business’ outstanding debtors (people who owe you money). If this is not applicable, they might consider either an overdraft or a loan. Above the limit for personal loans they will require trading and cashflow forecasts. Here the bank is concerned to ensure that the business is generating enough cash to repay any loan or overdraft. If it is an existing business, they will also ask to see up to three years accounts. Businesses lacking a track record of successful trading or sufficient security may qualify for a loan or overdraft under the Enterprise Finance Guarantee scheme. You cannot directly apply for a loan under the scheme – it is up to the bank to suggest it as an alternative. The bank may ask for a personal guarantee or additional personal security to support the lending.
So to answer your question, the amount you will have to contribute will vary depending upon the amount and purpose of the finance. In the current environment, banks are even less likely to take risks. They have always required evidence of the business owners’ commitment to the enterprise either in terms of the deposit or security/guarantee required together with evidence that the business is capable of meeting its commitments.
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