Whether you’re just starting out, purchasing a business or growing your business, understanding the details of what lenders are looking for can sometimes be difficult.
Equity is a funny word because it means different things to different people.
Lenders want to see that business owners are contributing and investing in their own company, therefore, every lender looks for the business owner to be investing some of their own money into the business.
This could be cash that you’re investing in your business now, or it could be cash that you’ve invested in the business some time ago, for example, when you purchased business equipment or supplies. It could also be cash that someone has gifted to you.
Having equity is important to business viability. Starting a business that is 100% debt financed is VERY RISKY and probably not viable.
At Women’s Enterprise Centre, our guideline is equity must equal 25% of total debt of the business.
For example, let’s say you want to start a shoe store and it’s going to take $100,000 to getstarted. We would look for you to contribute $25,000 (25%) and borrow the remaining $75,000 (75%).
Equity calculations can get quite complicated if you are an existing business which is why you’ll be asked to submit an up to date Balance sheet showing the equity you or others have contributed.
There are some limited situations where we may consider less than 25% equity. If you meet all of our other requirements but are a little low on the equity requirement, you should give our client services a call and ask to speak with a Business Advisor so we can talk about your specific situation.
SECURITY (aka Collateral)
In general, lenders look for some security or collateral to support the loan. In the context of financing, security and collateral mean the same thing. For example, if you have a vehicle loan, the lender uses the vehicle as collateral and if you don’t pay the loan, the lender can collect that vehicle and resell it. That is, of course, in a worst case scenario.
So, collateral = things or assets that you pledge to the lender. If something unfortunate or bad happens in the business, and you can’t repay the loan then the lender can go and get those assets and resell them and apply the proceeds to the loan balance. Business assets such as equipment, or personal assets such as vehicles, boats, houses and cash, would all count as collateral.
Some lenders look for 100% collateral or security. As a development lender, Women’s Enterprise Centre looks for a minimum of 30% of the loan to be covered. That means the realization value (ie the amount the lender would receive if the asset was sold) of whatever you pledge needs to equal a minimum of 30% of the amount you borrow.
VALUE OF COLLATERAL
We strongly suggest you use any security available because this is going to strengthen your loan application, and with security we can offer you a lower interest rate. If you don’t have security to offer, it doesn’t necessarily mean you’re out of luck. You may qualify under the Equal Access to Capital Lending Program which provides loans up to $50,000.
Although it is strongly recommended that you use security to qualify for a lower interest rate on the loan, there are exceptions that can be considered including:
- You have a strong business plan
- You’re applying for a smaller loan, and
- You have a beacon score of at least 650
We take a holistic approach to lending and provide ongoing support throughout the duration of the loan. If you’d like to learn more about equity and security, as well as our business loans for women, connect with us in one of our free Business Loan Info Sessions.