Never assume when it comes to commercial finance

While a majority of adults in the UK own their own residential property (and sometimes many) and therefore, personal mortgage lending is a well-known commodity, commercial (business) mortgages are considered more of a mystery, even by business owners.

The same applies for unsecured business lending. While most individuals have a credit card or a personal loan or overdraft, borrowing for your business is often a real learning curve for the business owner.

This article is a starting point to help dispel some commonly held myths relating to business lending most of which come from ‘Dave’down the pub who knew someone who knew someone!

Assumption One: I have a poor credit history, so my business won’t be able to borrow money

Somewhat true! OK, so let’s be real here. It is far from ideal if a client has a poor credit history. This usually relates to missed mortgage payments, credit defaults or County Court Judgements (CCJ). But, despite this, there are still options open to a business in this position.

Invoice finance and factoring companies are generally relaxed about credit history (within reason) as long as the business is sound, and the debtor book is of good quality. Asset-based lenders are forgiving as long as the underlying asset is sound. There can even be unsecured lenders who will consider lending to businesses or individuals with a blemish in their credit history if there is a ‘story’ to go with the blackmark. The one situation where it is almost impossible to overcome is if there is an outstanding CCJ with no justification

Assumption Two: My bank have declined my lending request so surely nobody will help me?

Absolutely not true! I hope that is one lesson can be taken from this article then this is it. Anyone who believes that they have more chance of being accepted by their own bank or will get the best deal possible from their own ban hasn’t been paying attention over the last decade or so.

Banks operate to strict credit guidelines and if your business does not fit to their preferred profile then it is highly possible that your request will be declined no matter your previous history with them or your previous account conduct.

Assumption Three: I have banked with my bank for 20 years- surely, they will help me! Like I said in point two, you have not been paying attention! I still hear this all the time. While a long-established history with one bank is nice and certainly won't harm any application you make, it will be considered alongside multiple other factors and is unlikely to be a deal breaker. I will also put here the old wives' tale that if you get on well with your bank manager then you are more likely to be approved for finance. Now, it doesn’t do you any harm to have your manager ‘onside’ or looking to fight your corner. But the power of local managers has been significantly reduced in recent years; to the point where while they are likely to write the credit report and put together the report for an underwriter to review. They are highly unlikely to have a huge amount of influence over the final decision.

Assumption Four: I have never borrowed money in the past so I must have a great credit history

Not true! It is called credit history for a reason. If an individual or business has no history or repayment debt, then it can be harder for a lender to quantify that you will be able to repay debt in the future. They cannot reasonably identify a history of debt servicing to base their decision on.

There have been many occasions where an experienced business owner has "failed" a credit search for a nominal facility due to their reluctance to borrow in the past.

This can be overcome by applying for and maintaining a small credit facility such as a credit card or an overdraft and ensuring payments to the facility are kept up to date and agreed limits respected.

Assumption Five: I am not a homeowner therefore lenders won’t want to lend to me

Not true. While a personal and liability assessment will likely form a part of many lenders' credit appraisals, there are other lenders who won't place a major emphasis on this document. They are more focused on business performance and if a business can fulfil its debt obligations without recourse to personal assets.

Assumption Six: My business is lossmaking or insolvent so I can’t apply for credit at the moment

Sometimes true but certainly not always. It is certainly preferable for a client to apply for finance when in a position of strength i.e. they are showing significant profitability, solvency and turnover growth. But it isn't essential. There are lenders who are more forgiving over loss making situations, as long as there is an explanation as to why the business has lost money. And that there is a plan to improve the situation moving forward.

The reality is that if your business is in a position where borrowing money is an option you want to consider (growing, struggling, buying an asset) it is always best to put any assumptions aside and do your own research. If you don’t fancy doing this yourself or don’t know where to start then it’s best to employ the services of a regulated broker to search the marketplace for you as they are likely to have an understanding of the quirks in this article.

James Blacklaws

JB Commercial Finance

James, an ex-banker, is a highly experienced and fully Independent Commercial Finance broker, authorised and regulated by the FCA. With whole-of-market access. He specialises in helping businesses declined by their banks; businesses looking to grow, survive and purchase commercial property.

07722 432128

james@jbcommercialfinance.co.uk jbcommercialfinance.co.uk