Since 2008, the market place for business lending has changed dramatically.
Where once there were a few, large, obvious lenders (mainly the banks), there are now an increasing raft of smaller, new niche lenders and funders in all sorts of sectors. Previously straightforward and easy, now the options are numerous, and at times confusing. The more choice we have, the harder it seems to know what is right for us.
If you’re a business owner who is new to the modern era of lending 'post 2008', or an owner who is looking around and is not sure where to start, below are 14 things I believe you must know about business lending today, before you embark on your next search:
1. There are lots of new lenders, who are not always easy to find
An increasing number of smaller providers are popping up, typically funded by high net worth individuals looking to ‘invest’ in debt funding.
Many are looking for some form of security, be it against property, business assets, physical goods/stock, invoices, purchase orders, vehicles, PDQ machines or even against leased property. An interesting new product is cash flow lending, released against turnover in the same way an overdraft is secured. Some unsecured lending is also returning.
The issue is many of these lenders do not advertise themselves, and prefer to be recommended by introducers. Page 1 of Google will not provide your business with every option (nor will Page 2). A well-connected broker will though.
2. There is a trade-off between tax and finance in your accounts
This is a major issue for numerous business owners when it comes to getting business finance. Tax avoidance is legitimately applied (not tax evasion!), where profits are presented as low as possible in order to pay as little corporation tax as possible. The knock-on effect of very low profit figures is that the business is less likely to qualify for a number of the better priced finance or business loans due to a lack of apparent affordability, as discussed earlier.
If your business is likely to need finance in the future, it is important to discuss with your accountant how your profits are presented, and whether the financial benefit lies in paying less tax, or qualifying for finance that also boosts the bottom line.
3. Adverse Credit does not mean finance is unobtainable
Whilst CCJ's and other issues are not helpful, it does not have to stop you getting funding. Lenders will take a view on what the issues are, depending upon the circumstances, and lending can happen.
What is important is to be upfront from the start. Not only will funders respect that, but it gives them a chance to decide if they view you as a good fit. They will find out eventually through searches, and if they are not aware from the start, they will decline due to a lack of trust, wasting everyone’s time. Don’t be afraid to discuss the issues at hand, either business wise and/or personal.
4. Our obsession with APR needs to change
In today’s market there are plenty of short-term C&R facilities that work very well to improve a business’ bottom line, such as the emerging stock finance facilities for traders of physical goods.
Interest rates at first can look daunting, particularly when multiplied to give an APR. The truth of the matter is that these facilities are never lent on an annual basis, and as such using APR is an inappropriate means of judging such a finance product.
Where we are taught to judge finance on costs/timeframe alone, it is ever more useful to judge the effect the finance product will have on your business and your bottom line. There is funding that exists which, whilst more expensive than one would like, means a business can succeed at a much quicker rate with it, than without it. A reluctance to consider available funding due to perceived cost means your business could be missing out on valuable funds that will take your business to a level not otherwise possible.
5. Unsecured funding is available
Whilst most funding is secured to some degree or another, unsecured lending is beginning to return to the marketplace. The caveat is it is provided to businesses with strong cash flows i.e. they are a good bet not to go under. Again affordability is the key in terms of net income. If you’re not sure whether you qualify, a good business finance specialist will be able to tell you.
6. Interest only is a thing of the past
Unless you need short-term property funding, or are a large commercial farmer, “interest only” funding is pretty much dead. Those of you still on interest only from old agreements are most fortunate!
Interest only works solely in a boom, whilst some may also argue it’s an irresponsible product that fuels a bubble that eventually bursts spectacularly (sound familiar?)
Only the strongest of the strong would qualify now. Otherwise, it is used by the High Street Banks for a 6-12 month period as a teaser to win your business. Again this is given to strong businesses only.
7. Calculate Affordability
Most business lending is now on a capital and repayment basis, so the amount a business has to pay back each month is far more than on the old interest only terms. Most lenders assess this by looking at the business’ net profits i.e. is there sufficient room in the figures to pay for a loan each month? A 100k loan at 3.5% over base over 5 years, is a monthly repayment of £1,819. A business will need in the region of 1.5 to 2.5 times that net positive income to typically qualify, (the exception being if the loan will clear other existing bills that will free up more profit – lenders can approve on this scenario too!). It is easy to do the calculations at the beginning to see if a business loan is a viable proposition, or not.
8. 2 years filed accounts are not necessary
Very few lenders actually need 2 years filed accounts, and I include the high street banks in this. Whilst it is usually requested, they do typically want to see 2 years information, which would include one year filed, and the remainder in Management Information. In some cases, if the business is growing quickly, and Directors have a previous track record, less time can be considered.
The 2 years filed accounts criteria is not entirely correct.
9. Think carefully before changing career
From a business finance point of view, this is extremely important to consider.
Apart from affordability, the most important aspect for any lender is the industry experience of the Directors/borrower. Lenders want to know they have a “safe pair of hands”, and therefore a lack of experience is highly likely to lead to a decline. Many folk are trying a lifestyle change (e.g. an accountant buying a care home to run, or a city professional looking to buy holiday lets to run in Cornwall). Lifestyle/Sector changes are by far the hardest sector to fund. If you do not have experience in the sector of your choice, it is wise to either work for someone else for 2-3 years to get some experience, or find another Director to join your business who does have experience. It is critically important.
10. A different bank to your current one might help!
Whilst there are some general parameters for lending, it is not true that all banks give the same decision, and are therefore worth approaching.
Each bank has a preference for certain sectors, and a dislike for others. In commercial property investment for instance, the minimum lease terms vary from bank to bank. Don’t be afraid to ask a different bank for help, or if you’re not sure, as a specialist for their thoughts on your situation.
11. Virtually all funders require a Personal Guarantee, and here’s why..
This is a pretty important concept for most business owners to understand, because without giving a PG, many lending routes will be off limits, particularly secured debt lines.
The reasons are straightforward: lenders want to know that borrowers are good for the loan. This is because in an uncertain climate, lenders are not interested in repossessing. They are already sat on such a high volume of property or stock that they either cannot sell, or will not sell because they will not get their money back. Previous reckless lending has put the economy where it is, left lenders and their savers vulnerable, and lenders are blamed for that. PG’s are a tool to help safeguard the funds lent, and therefore the firms lending.
Whilst many business owners may not like that, it is the reality of lending in uncertain times, under the backdrop of reduced repossession values.
It is true that some business owners are not able to support a PG, and if that is the case, then lending is likely to unavailable. However, if you can support a PG, please note in many cases, including high street bank commercial mortgages, you may well need to give one.
12. Lenders do want to lend!
There is another myth floating around, perpetuated by the media, that lenders don’t want to lend. If you think about it, it is a ludicrous statement!
Lenders make profits by doing one thing, lending (with the exception of banks, who do make profits from the retail side as well). What needs to be understood is the lending landscape, what’s changed, why it has changed, and what shape a business needs to be in to qualify for the right sorts of business lending. If you consider business finance to be a key aspect of your future business growth, it is important to understand what steps are necessary to qualify.
13. Asset & Liability Statements: why there are important
Business owners, as part of the PG scenario, are always reluctant to produce Asset & Liability statements. “The lending is for my business, not me, why do you need that?”
Whilst I understand the wish for some info to remain private, it does not always help getting finance.
There is a simple answer for why this is required: lenders do not want to be pumping funds into a business that is propping up a hidden personal debt situation. That is what they are looking for and is an area all lenders increasingly look at.
On the plus side, if you do not have a heavy debt situation in the background, there is nothing to worry about by providing this information. Whilst some will still be reluctant on principle, the lack of disclosure on this subject will have an adverse effect on any application for funding.
14. Understand all of your funding options
There is a mountain of new lending sources out there, and it is quite hard to stay on top of all of them. After all, a business owner does not want to spend all day looking for finance for their business….
… but a business finance broker can and does. The better ones will have access to all sources, have key national contacts in the High Street, as well knowing some off-market private funders who do not advertise. At the very least brokers can a) tell if your business can get funding and b) what types of funding are available.
Some brokers do not charge broker fees on certain products, and are paid as part of any arrangement fee, so they are not adding any cost to the borrower’s purchase chain. In these cases, good brokers are worth their weight in gold: they get business owners quickly and efficiently to the right sources of funding, for no extra cost.
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About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.