Almost every business has some kind of debt. Almost every business has further borrowing requirements. But when does the debt you already have prevent you from securing the business finance you need for the future? Here are the facts, broken down by different types of debt.
Having a business loan can actually improve your chances of getting another one – assuming, of course, you adhered to the terms and conditions and made all your payments on time and in full. If your company has successfully repaid money borrowed via a start-up loan, equipment financing or business credit line, that’s a clear indication it’s a good credit risk. What’s more, the longer you’ve been operating and the broader your credit history, the better your chances of negotiating an advantageous interest rate.
Many small businesses lack a credit history, so lenders instead consider the personal histories of the principals. One of the things they will consider is your mortgage, which is likely to be your largest personal outgoing. If it’s particularly high compared to your income that indicates that your finances are rather highly geared, making lenders cautious about extending further credit. Chances are that lenders will also consider the level of equity you have in your home – the difference between its value and your outstanding mortgage. If you have plenty of equity, you can re-mortgage and use the funds for business purposes. If not, there’s little room for manoeuvre.
In general, your business and personal credit histories are not intertwined. However, if you’ve used your personal collateral – for example, by re-mortgaging – to support the business, things could be very different. Indeed, according to Experian, around 50% of entrepreneurs use personal credit for business purposes at some point. In this instance, business lenders will consider your outstanding debts and payment history for car loans and other personal finance, interpreting your past behaviour as an indicator of what to expect in the future.
Unlike mortgages and personal loans – which usually have fixed terms, interest rates and monthly repayments – credit cards are flexible forms of finance. When business lenders look at your personal finances, they will pay particular attention to your revolving credit and how you use it. Even if you have no outstanding credit card borrowing, they will factor in your credit limit and evaluate whether you could meet their repayments as well as the debt if you maxed out your cards. This scenario might seem hypothetical, but if your business found itself in trouble there would be strong temptation to borrow to the limit on your credit cards to stave off trouble.
Some younger entrepreneurs will still have significant student loans to repay. In some cases, these can be so substantial that it will affect their ability to secure additional credit. If you’re looking for business finance and need to borrow in a personal capacity, you might do better to talk to alternative lenders, who apply different criteria from banks.
Alternative lenders can make all the difference via an emergency business loan (with funds inside your account in under 24 hours), asset-based finance (where you borrow against the value of your premises, plant or equipment) or invoice factoring or discounting (enabling you to borrow the bulk of the value of your invoices as soon as you issue them).