Pre-Approved For a Business Loan? Know This
With systems and resources improving, algorithms and statistics becoming more reliable there is an increase in ‘pre-approved’ loan offers for businesses.
In the personal finance world pre-approved facilities have long been the norm, we have all had an offer through the post advising that a credit card of £x has been set aside for us, an offer to transfer the balance or even a call from the bank to offer you lending.
As systems improve we are seeing an increase in pre-approved business facilities. What you need to know is the often these are not quite what you think.
Often the lender will have made an offer of finance to you without undertaking a full credit search. A full search cannot be done without your consent so the lender will have checked your public information. This means the lender has checked for;
- IVAs, CVAs or Bankruptcies
- Any filed information at Companies House
Based on this they will make an offer to you.
Remember that when taking out finance for your business then a search will be done on both you and your business. Applying for commercial finance has an impact on your personal credit record as well as your business record.
If you know there is something untoward hidden in your credit history then don’t assume that the pre-approved offer takes account of that, it likely doesn’t. This means you could end up with additional credit applications and the pre-approved loan being declined.
The Amount Changes
The amount of any pre-approved facility is driven by what the lender can garnish from the public records. With most limited companies only needing to file and abbreviated balance sheet and no profit & loss then the actual financial information used by the lender in the pre-approved offer is very limited.
It is not uncommon for a company to have a strong balance sheet but a very minimal turnover. Property companies, holding companies or members of a larger group can all have strong balance sheets but a minimal turnover.
When the lender obtains the full trading accounts then the offer can change or even cease.
The amount of the pre-approved offer is based on certain averages and assumptions which don’t always play out. If you know the your turnover probably won’t support the loan amount offered then don’t assume the loan offer will actually be provided to you.
An Existing Lender
Pre-approved offers from an existing lender are commonplace. If you make your loan repayments on time every time then the likelihood is the same lender will want to lend to you again. Makes sense really.
Typically the offers made by an existing lender are more reliable as the lender has more information to base their offer on. Lenders tend to apply a greater weighting to the conduct of existing clients than they do to publicly available data. This means that the pre-approved offers tend to be more reliable.
Regardless of this, the lender will still want to see various pieces of information from you so the points raised above are still relevant.
The Underlying Issues With Pre-Approved Offers
From a regulatory standpoint the lender has an obligation to check affordability. This means that whatever the pre-approved offer says there will always be a caveat until all the information is known.
As a guide, don’t hang your hat on a pre-approved offer. By all means consider it but remember that if one lender is happy to lend then so will another, so take your offer and talk to your specialist commercial broker (ah-hem, we are here!) or compare it to other offers in the market. Do the comparison before you formally apply as this will be when your credit record is likely looking the best.
For any questions about pre-approved business loan offers then get in touch or use the form below to ask what you want. As ever, any comments please add them below.
By Dave Farmer