How Much Can My Business Borrow?
Updated: Aug 12
One of the first questions businesses ask when considering finance is: how much can my business borrow?
There isn't a single answer or a universal formula. Two businesses with the same annual turnover could have very different borrowing capacities depending on their cash flow, existing debts, trading history and recent financial performance.
Some lenders use relatively simple turnover-based calculations, while others carry out a broader assessment of the business and its ability to support the proposed repayments.
Understanding the factors lenders consider can give you a better idea of how much your business may be able to borrow.
Is business borrowing based on turnover?
Turnover is an important starting point for many business lenders because it indicates the scale of the company.
A business generating £2 million of annual revenue would generally be expected to have greater borrowing capacity than one turning over £200,000.
But turnover alone doesn't tell the whole story.
Consider two companies that each generate £1 million of annual sales.
One has £150,000 in the bank, consistently generates positive cash flow and has little existing debt. The other regularly uses its full overdraft, has several existing loans and has recently experienced returned payments.
Their turnover is identical, but their capacity to take on additional borrowing may be very different.
This is why lenders typically consider turnover alongside the wider financial position of the business.
Is there a rule of thumb for how much a business can borrow?
There is no universal formula, but turnover can provide a useful starting point.
For short-term business lending, a rough rule of thumb is that borrowing may be limited to around one to two months of business revenue, depending on the lender and the financial strength of the business.
For example, a business averaging £50,000 of monthly revenue might potentially be looking at short-term borrowing in the region of £50,000 to £100,000.
That doesn't mean a business turning over £50,000 a month can automatically borrow £100,000. The lender still needs to be satisfied that the repayments are affordable.
For longer-term business loans, lenders may be prepared to consider a larger amount relative to monthly turnover because the borrowing is repaid over a longer period.
Conversely, a short-term loan can create substantially higher monthly or weekly repayments, which can constrain the amount a business can sensibly borrow.
Existing borrowing also matters. A business may appear to fall comfortably within a turnover-based rule of thumb but already have significant loan repayments leaving the bank each month.
Rules of thumb are therefore useful for establishing the possible size of a facility, but they aren't a substitute for assessing affordability.
How important is cash flow?
Cash flow is one of the most important factors when determining how much a business can comfortably borrow.
Whatever the size of the loan, the business needs sufficient cash to make the repayments while continuing to meet its other commitments.
Lenders may therefore examine recent bank statements or open banking information to understand how money is actually moving through the business.
They may look at:
average monthly credits;
cash balances;
use of overdraft facilities;
existing loan repayments;
returned or unpaid items;
payments to HMRC;
significant changes in revenue; and
whether cash flow appears to be improving or deteriorating.
A business may have strong annual turnover but still struggle to support additional borrowing if very little cash remains after its existing commitments.
How does existing borrowing affect how much I can borrow?
Existing borrowing is another significant consideration.
If your business already has loans, asset finance, an overdraft or other finance commitments, the repayments reduce the cash available to service a new loan.
This doesn't mean that having existing finance prevents a business from borrowing more. Many established companies use several types of finance simultaneously. The key question is whether the overall level of borrowing remains affordable.
For example, a business with £50,000 of existing debt and strong cash generation may be in a better position to borrow than a business with only £10,000 of debt but weak or inconsistent cash flow.
Lenders will therefore normally consider both the amount outstanding and the repayments attached to it.
Does profitability determine how much my business can borrow?
Profitability matters, but it isn't always as straightforward as looking at the bottom line in the latest accounts.
A company's statutory accounts provide useful information, but they describe a historical period.
The business may have grown substantially since those accounts were prepared.
Alternatively, its financial position may have deteriorated.
There can also be legitimate reasons for relatively low accounting profits, particularly where a business has been investing in growth.
A lender may therefore look at profitability alongside current cash flow, recent trading performance and the reason the business wants to borrow.
Ultimately, the lender needs to be comfortable that the business can service the proposed repayments.
Does trading history affect borrowing capacity?
Generally, a longer and more stable trading history gives a lender more evidence on which to assess an application.
A company that has traded successfully for several years can demonstrate how it has performed through different periods and economic conditions.
A recently established company has less historical information available, making future performance harder to assess.
That doesn't mean younger businesses can't obtain finance, but the amount and type of funding available may be more limited.
Different lenders also have different minimum trading requirements.
Does my business credit history matter?
Credit history can influence both whether a lender is prepared to lend and how much it is willing to advance.
A lender may examine the credit history of the company and, depending on the product, its directors or guarantors.
Issues such as previous defaults, County Court Judgments (CCJs) or other adverse credit don't necessarily mean that funding is impossible.
The lender is likely to consider factors such as:
how serious the adverse credit was;
how recently it occurred;
whether it has been satisfied;
the circumstances behind it; and
how the business has performed since.
A historic credit problem can present a very different risk from recent or continuing financial difficulty.
Can security increase how much my business can borrow?
Potentially.
With a secured business loan, the lender takes security over an asset. Depending on the lender and facility, this could include property or other suitable assets.
The availability and value of security may allow a lender to consider a larger facility or longer repayment term than it would be comfortable providing on an unsecured basis.
However, security doesn't replace affordability.
A lender will still want to understand how the business expects to repay the loan from its normal operations.
Does the loan term affect how much I can borrow?
Yes.
The same amount of borrowing can produce very different repayment requirements depending on how quickly it has to be repaid.
For example, repaying £50,000 over 12 months places considerably more pressure on monthly cash flow than spreading the principal repayments over 36 months.
A longer term can therefore make a larger facility more affordable.
However, extending the term can also increase the overall cost of borrowing, depending on how the loan is priced.
The appropriate term should reflect both the purpose of the borrowing and the business's ability to service the repayments.
How do lenders decide the final loan amount?
Different lenders use different underwriting methods.
Some rely heavily on automated credit models. Others carry out more detailed manual underwriting.
A lender might start with the amount you've requested but conclude that a smaller facility is more appropriate.
Alternatively, its assessment may indicate that the business can comfortably support the requested amount.
In practice, the decision will usually reflect a combination of:
Turnover + cash flow + existing commitments + trading history + credit profile + purpose of borrowing + available security.
No single factor necessarily determines the outcome.
Should I borrow as much as I can?
Not necessarily.
The maximum amount a lender is prepared to offer isn't automatically the amount your business should borrow.
Borrowing should ideally have a clear commercial purpose.
If £30,000 is sufficient to fund the stock, equipment or working capital your business needs, borrowing £50,000 simply because it is available increases both your repayments and financing costs.
The relevant question is not just “How much can I borrow?”
It is also “How much does my business actually need, and can it comfortably repay it?”
Applying for business finance with Adelpha Capital
Adelpha Capital provides business finance to established UK SMEs.
We assess each application on its individual circumstances, considering factors such as turnover, recent bank conduct, cash flow, trading history and existing financial commitments.
If you're looking for business finance, you can apply online or contact the Adelpha Capital team to discuss your requirements.