Carl Faulds discusses why it is so hard to attain business loans from banks and why we need to start to look to alternative lenders.
In the current climate, getting business loans is not easy. Getting the real reason why your bank said no can be equally difficult. In most cases, the decision will be made by a centralised loans centre, not by your local manager, so your manager may not know himself or herself.
The cash flow trap
The first reason you could find yourself on the wrong end of a negative decision is cash flow. If you can’t demonstrate a steady revenue stream, your bank will worry about your ability to meet repayments and interest charges. They’re also likely to be concerned about any debts with other lenders, which can also impact on your ability to make repayments. Some of the more cautious lenders will not even consider business loans with outstanding finance arrangements.
A lack of security
Of course, many business loan agreements will demand substantial security. This presents few obstacles for large companies, which own significant amounts of land, buildings and plant, but can present a high hurdle for SMEs and especially start-ups. In these situations, banks normally demand personal guarantees from the business owners, but that makes you personally responsible for paying back the loan. This can place you in a precarious position if your cash flow falters and means that your family home is literally on the line.
Your credit rating really counts
More fundamentally, your business may simply fail to meet the bank’s credit score standards. Since the financial collapse of 2008, lenders have re-evaluated their criteria to avoid future problems – this will hopefully deliver greater stability to broader economies but it has also tightened the screw for personal and business borrowers. If you can’t muster a high credit score and demonstrate that you can meet repayments by a wide margin, chances are your bank will show you the door rather than the money.
A few other things to consider
There are also a few reasons that are less immediately obvious. One is a business that relies on a few key clients – banks like to see a broadly-based trading history and are sensitive to the risks that a loss of a few high-spending customers can present. At the same time, they prefer to see a long and steady track record, including consistent generation of profits. Businesses that have been through hard times or that can only present a short and unpredictable trading history are simply not good risks in today’s climate.
Banks may also take a view on your management structure and the team in place, and may be concerned about potential downturns in your industry. The former is something that you can address but with the latter, you’re a hostage to fortune: your business may be powering ahead, but if other companies in the sector are declining your bank may not want to get involved.
Think beyond banks
Thankfully, none of the above issues present any obstacles to alternative financing such as providing emergency business loans and invoice finance. Alternative lenders are readily available to provide business finance options and as banks continue to fail to serve SME’s in this area, are increasingly becoming the way forward for many companies seeking finance opportunities. Such funding can be available to your business within a very short timeframe without the added hassle of mountains of paperwork or high interest rates.
Carl is a business recovery specialist and as Managing Director of Cashsolv he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.