How to work out what your business can borrow

Take profit before tax from your most recent accounts. Add back directors' salaries and dividends above what it would cost to employ someone to do the job, employer pension contributions for the directors, depreciation, amortisation, and any genuinely one-off costs — a legal dispute, a relocation, a write-off that will not recur.

A business showing £40,000 of profit after paying two working directors £70,000 each, with £25,000 of depreciation, has an adjusted figure closer to £165,000 once a market salary for both roles is deducted. That is the number a competent underwriter works from.

Do not calculate the payment at the rate you have been quoted. Lenders test affordability two to three percentage points above it, so a facility offered at 8% is assessed at 10% or 11%.

On a five-year amortising loan of £250,000 at 11%, the annual payment is roughly £65,000. That is the figure your adjusted profit has to cover.

Lenders want headroom, usually expressed as debt service cover of 1.25 to 1.5 times. At 1.25, our £165,000 of adjusted profit supports annual debt service of £132,000 — comfortably more than the £65,000 above, so £250,000 is affordable.

Run it the other way to find the ceiling: £165,000 divided by 1.25 is £132,000 of serviceable annual payment, which at 11% over five years supports roughly £500,000 of borrowing.

Remember to deduct debt you already have. Existing asset finance agreements, an outstanding loan and a director's loan being repaid all come off before the new facility is assessed.

Affordability tells you the maximum a lender would be willing to service. Security tells you the maximum they will actually advance, and the facility is the lower of the two.

Unsecured, that ceiling is roughly one month of turnover, occasionally two. Secured on property, it is typically 70% to 75% of value less any existing charges. Secured on equipment, it is a proportion of the asset's resale value.

A business that can comfortably afford £500,000 but has no security and turns over £1.2m will be offered around £100,000 to £200,000 unsecured. That is not a credit problem — it is the security ceiling binding first.

If the number you can borrow is well below what you need, the answer is usually not a different lender. It is a different product, or a different structure.

Equipment goes on asset finance, secured on the equipment. A receivables gap goes on invoice finance, secured on the ledger. A property purchase goes on a commercial mortgage over fifteen years rather than a five-year loan. Splitting a requirement across the right facilities routinely produces more total funding at a lower blended cost than forcing it all through one.