Many businesses believe that if the banks say no to them, it must mean it’s impossible to get a loan. In fact a good number of businesses don’t even bother going to the bank, or trying, because they assume they cannot qualify. This assumption can be incorrect, as it is not only possible to get business loans with adverse credit, but also if the business’ accounts do not show a profit. How is this possible?
Market Changes in Funding Criteria
As the economy has begun to stabilise over the last few years, non-bank funders and lenders have been looking at how else to lend to the marketplace. In some cases, lenders are not necessarily basing decisions purely on profits, but in the main on the strength of the Personal Guarantees (PG) from Directors or associated third parties. Directors are credit scored, and the strength of a PG usually means the Director owns some form of property with equity in it.
It is possible in today’s marketplace to get unsecured loans with a strong PG and without a charge registered against any properties. Essentially some lenders are saying that whilst the business cannot fully support a loan, the available of strong PGs means there is a total package available that will support a loan in their eyes. The rates are not mind-blowing, as you can imagine with unsecured debt, but the reality is some lenders are now providing the opportunity for businesses to get some much needed working capital into their operation, where otherwise they could not.
What else is possible?
It is also possible to raise finance with adverse credit, or without proving business income. The funding is at present secured with a legal charge, but as a result the rates tend to be somewhat lower. (N.B. this is not an equity release, this is a loan borrowed by the business). It is therefore possible to qualify for a business loan if Directors own some form of property with equity in it, and as a result credit score well.
The issue of Personal Guarantees (PGs)
Whilst this is an encouraging development, many Directors are hesitant, or reluctant altogether, to give Personal Guarantees for a business loan. The concept takes minds away from a business decision to one that feels more emotional. Many Directors feel a Director’s Guarantee or Debenture should be deemed sufficient. From a lender’s point of view this argument doesn’t hold weight because there is nothing to stop a limited company closing down, starting back up as Ltd. company Number 2, and not having to pay back the finance. Whilst the majority of businesses have no intention of being so devious, there is a small minority that do, and it means this form of security is becoming ever more necessary in order to lend, across the whole funding spectrum.
The reality is PGs rank as a last resort behind the business’ ability to repay in default situation. Whilst each lender’s criteria for a PG will differ, it is worth finding out what they consist of. In most cases it can be limited to the loan amount. To read more on the real impact PGs have, a fuller article on the subject can be found by clicking here.
Another sector that can get funded…
One further type of business can gain potentially, and that is the business that trades physical goods. These of course are importers, exporters, wholesalers, distributors, stockists and even retailers. Some of today’s alternative lenders will take a view based on purchase orders coming in, tied together with the stock as security. This type of funding can be provided to start-ups, as well as those with bad credit and low profit levels.
So the marketplace for business lending is certainly changing. Some interesting angles are coming into play, and at the very least, current non-bank sources offer certain types of businesses the opportunity to get funded, where traditional routes are unable to help. They have to be worth considering.
If you want to find out what the market offers, as quickly as possible, fast-track your funding search by clicking on the link below:
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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.