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

Equity can be a confusing 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. At WeBC we call this your equity contribution, but other lenders might call it an owner investment, or capital contribution, among other terms.

Equity 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. If you are an existing business, equity can also include profits that you’ve made in past years that you retained in the company (Retained Earnings).

Having equity is important to business viability. Starting a business that is 100% debt financed is VERY RISKY and makes it very difficult to secure a business loan.

At WeBC, the guideline for our business loans is that your equity contribution 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 get started.  We would look for you to contribute $25,000 (25%) of your own money and borrow the remaining $75,000 (75%).

Equity calculations can get quite complicated, especially if you are an existing business. If that’s your situation, we will ask to look at your balance sheet (if you have one), as this is where your equity will be recorded.

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)

People often confuse Equity and Security, but they are different things. As we just learned, Equity is how much money you have (or will) contribute to the business, and Security refers to assets that are pledged to the loan just in case something goes wrong and you aren’t able to repay the debt.

In general, lenders look for some security or collateral to support the loan.  In the context of financing, security and collateral mean about 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 is 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 developmental lender, WeBC offers both secured and unsecured loans, although we always encourage you to pledge security if you have it available, as it can get you a lower interest rate and improve your changes of getting approved.

For our secured loan program (for any loans over $50,000), we require the borrower to pledge assets worth at least 30% of the loan value. 

For our unsecured lending program, also known as the Equal Access to Capital Lending Program, we can provide loans up to $50,000 without any security or collateral. To qualify for this program we look at the following:

• You must have a strong business plan
• You must have a credit score of 650 or higher
• You must be applying for $50,000 or less.

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.