The Federation of Small Businesses (FSB) produced a recent report stating that there are 5.7 million SMEs in the UK and collectively they employ around 16 million people.
For these small businesses, the opportunity to access business loans can be crucial to fund their growth including inventory, staff wages, production and more. However, despite the demand, several business owners struggle to access much-needed finance for their business and today we explain some of the reasons why.
Being self employed
Being self-employed or a sole trader is a real barrier when trying to obtain finance. Mainstream lenders like to see a regular salary or years of accounts as it provides reassurance that you have a regular income and will be able to repay your loan.
Being a one-man band or start up with a lack of trading history sends warning signs to lenders that you are high risk and your income is less predictable.
To overcome this, you need to build up years of accounts and demonstrate that you can generate a healthy profit and income. You may also find more success applying through a broker, who has access to numerous lenders and is used to working with self-employed individuals rather than going through lenders one-by-one.
History of bad credit
By having a history of adverse credit, it will significantly affect your ability to get a business loan. By having a backlog of defaulted payments for things like personal loans, payday loans and credit cards, it means that the lender potentially has less chance of receiving their full repayment on time.
To overcome this, you can slowly build up your credit rating. Start by accessing your credit score on a free trial or pay £2 for Government-issued credit report. Begin by closing any loan or credit card accounts that you do not use and get used to repaying your outstanding debt on time. If this is a difficult task, consider taking debt advice from a charity such as StepChange to help you consolidate your debts and pay them off collectively.
Remarkably, sharing a joint account with someone with bad credit can also affect your chances of approval. If you share a mortgage or bank account with a spouse, sibling or parent who has very poor credit (IVAs and CCJs), this may reflect badly on your creditworthiness.
For some lenders, having a joint account with someone with bad credit assumes that you may have to help them out financially and it is an extra financial burden. There are several cases every day of individuals who are turned down for mortgages and personal loans because of their spouse’s credit history.
Lack of security
If you have poor credit, you may need to add some security to your business loan application. This gives the lender a backup so that they can still recover their funds if you default on payment.
This can include a property such as your house or office premises and the amount you can borrow is leveraged against your property’s value. Other options include having the director of another company or another individual to provide guarantees for repayment.
In corporate finance, some very specific options include mezzanine finance or senior debt to provide part loan and part equity in your business to access much needed capital. Whilst this results in giving up a stake in your business, it can facilitate the much needed funds to grow your business.