If you are looking for a loan to help you build your business, what do you need to do to put yourself in the best position for a successful application?
The answer is complex, as nothing in life is straightforward. It isn’t always easy to find out what criteria the lender is looking for before you submit an application, so a lot of time can be wasted.
A loan is appropriate when a business needs to expand and when the amount of capital raised by way of equity subscription is at a level where the business can bear some debt. The profitability of the business is important, as lenders like to lend to profitable businesses. I recently saw an example of a lender insisting on three years of profitable trading before considering a loan. This is a conundrum, as if you’re profitable you might think you don’t need a loan.
Often, if the business does not have any hard assets, it will be difficult to know what the appropriate level of debt is, as there is no security for a lender to secure a loan against. This is a difficult position to find yourself in as most lenders now want to secure all loans against property, even business loans. In some cases, a guarantor may be sought – and the lender may insist a property is put up as security.
Assuming you can get a loan, there are options to consider:
• Fixed or floating rate of interest. It would be advantageous to fix the rate of interest now, as it is likely interest rates will rise
• Bullet interest, or pay-as-you-go
• Repayment or repayment as a bullet
Clearly, having a loan where repayment ahead of schedule doesn’t trigger penalties is also important.
Once you have decided to look for a loan, the following are a few practical matters to consider. A business loan can be essential in helping a profitable company to grow. But how do you know if it’s right for you?
FIND THE RIGHT LENDER
Find a lender that is prepared to assess the loan on a proper commercial basis.
There is a tendency for the alternative lenders to try and make the loan into a property transaction – that is, they will try to secure the loan against property.
Be aware that often, even if you ask them to assess the loan commercially, the lender will try to move you towards security against property.
FIND THE RIGHT LENDER
Prepare a proper business presentation, explaining what the loan is to be used for.
Try to be patient with the lender; it may be that the team will not read the paperwork as they have a fixed deal in their mind. Of course this is slightly odd, but I have encountered it many times with clients.
ASSESS THE RISKS
Consider how you can use your house (with your spouse’s permission!) as security against the loan. However, you must assess the likelihood of losing your home and finding yourself on the street. Ensure you are fully aware of the consequences of defaulting on the loan: inadvertently you could be mortgaging your property without realising it. Remember, the lenders are there to protect themselves – not you.
LOOK AT OTHER OPTIONS
Explore other sources of finance, such as invoice discounting and factoring. These can be raised against specific invoices and may be an easier form of finance, although the terms will depend on the credit rating of the customer. By following this advice you are more likely to succeed in getting a business loan but, remember, it takes time and comes with its own risks.
Clive Hyman is founder of Hyman Capital Services www.hymancapital.com
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