The best way to demystify a few misconceptions about business lending is to start by quoting Michael Caine.
Whilst I can’t promise this will blow your blo*dy doors off, it may make you think a little differently.
I Never Used To Use Amazon
Roll the clock back 10 years and I never shopped on Amazon. These days if I want something specific and want delivery the next day then it is an easy option. My point being that just because you have always used your bank to finance your business doesn’t mean that it remains the best option.
The last 10 years have seen a massive movement within the business lending sector and a growth in lenders keen to work with businesses and do something differently. Like Amazon, many of these are using high end systems to do things quicker and push the boundaries of borrower expectation.
Just because you have always done something one way doesn’t mean you always should. Strange, but we can accept this in almost every way of life apart from banks, why?
It is an old saying that remains true. Every business is dependent on cashflow. No cash means no business.
This always makes me smile when a business comes to me quoting great net profits and expecting this to be the golden ticket to getting whatever finance they want. It helps, don’t get me wrong, but loan affordability isn’t about net profit, it is about net cash flow.
The challenge with this is that many small businesses don’t understand net cash flow and can’t look at a set of accounts and work this figure out. This means that they think they can afford borrowing (and probably can) but the lender thinks otherwise, which in turn comes as a surprise to the borrower.
Profits Are Essential
Many things in finance and lending are contradictory, here is another. Having just said that it isn’t about profits but that you need to show enough cash being generated, I now contradict that.
Just because a business is loss making doesn’t mean it can’t borrow.
There are two main reasons why a business is loss making. Firstly, it just is and has either too high costs or too low sales. Secondly, it is meant to be loss making, it is all part of the plan and the profits are yet to come. The second reason is common with start-ups or businesses where a critical mass is required for profits to be gained.
The second option is prime for equity finance. The first option is more common with the loss making often being temporary or for some justifiable reason. In this case the business can raise finance, it can borrow, there are just more considerations to be made.
As a guide, almost every business can borrow, it is a question of risk, price and where those two factors sit in what is comfortable to you.
Most banks love security. Given the chance they will take a charge over a property to support business lending. There are several reasons for this (and I won’t bore you with capital adequacy or Basel compliance as it really is a cure for insomnia).
What has happened is that most businesses who look to borrow from their bank expect to have to provide security, normally a charge over their own home. This is great from the lender perspective, it gives them security, but for the company director it is a huge insecurity, knowing that if the unexpected happens they have everything to lose.
OK, you can insure against a claim on a personal guarantee which may protect your home, but the much preferred option is to borrow without ever providing your home as security. There is a lot to be said for sleeping at night.
Many business are still unaware that they can borrow up to £1m unsecured. Certainly for borrowing up to £250k then a business should be considering other options if their bank wants a charge over their home. I have talked before about how not wanting to guarantee your business’s borrowing is seen by a bank, but sleeping at night and wanting to protect what you have earned shouldn’t be frowned upon.
If you want any help with raising finance for your business then let me know, happy to help.