I often use the bar stool analogy when I’m asked by a client what funding is available to their business. Let me explain. A bar stool has four legs. If all four are sound and solid, you should have no issues accessing support from a tier 1 funder and obtain favourable terms. But if one of the legs is a bit shoogly (sic) then you may have to find a funder who has a more commercial appetite and doesn’t mind sitting on a stool with a wonky leg.
Of course, the trade-off for access to this type of funding is often reflected in the rate you will pay.
To explain further I will expand the bar stool analogy using definitions which reflect credit appetite.
Leg 1: Financial Performance
If your business is profitable it has more chance of meeting the serviceability criteria set by the lender. In other words, can the profit which your business generates service the debt repayments you’re looking to take on?
If your business generates £10k of profit per year and the loan repayments total £20k per year, you likely won’t tick the serviceability box.
Equally your balance sheet must be solvent. Ideally your net worth will be a higher figure than you’re asking to borrow. Also, forget about EBITDA – when you’re looking for traditional debt funding from a mainstream lender, net profit is what counts.
Also, try and have your accounts up to date as lenders like to review as current a position as possible.
Top Tip: Funders will often look for the most recent financial position so try and get your accounts up to date before making your application. Also speak to your accountant about producing management accounts as these can be helpful when showing the current health of your business.
Leg 2: Credit History
This is self explanatory but if either the business itself or a director/partner/proprietor has adverse credit in the form of defaulted payments or CCJs (County Court Judgements) (satisfied or otherwise) then a lender may, unfairly or not, take a view that you can’t be trusted to take on new credit.
We’ve often seen perfectly profitable, well established companies with a sound lending proposal being denied tier 1 credit because of a historic CCJ caused by a past supplier dispute.
Credit worthiness also extends to HMRC – is your VAT & PAYE up to date or in arrears?
Crown preference has recently changed and funders now take a more conservative approach to HMRC arrears. Funders often use software to assess this and your computer generated credit score can often affect the outcome of an application before it’s even started.
Top Tip: Do a quick credit report in advance of your application and share this with your broker. They can then help steer you towards funders who will likely view your report favourably and head off any problems before an application is submitted.
Leg 3: Security
Typically most lenders will ask for some form of security over a certain funding level.
At a minimum this will be an unsupported directors guarantee, meaning the director commits to covering any shortfall to the lender in a collect out scenario but doesn’t actually collateralise the guarantee over his property or other personal security.
A supported guarantee actually takes a charge over a property. The argument funders will put forward for this is that they like their borrower to have some form of skin in the game.
Where a tangible security is taken, whether it be property, plant and machinery, stock, receivables or other, the funder likes this to be higher than the borrowing value.
We’re typically seeing 75-80% loan to value as being the top end of comfortable. So if you want to borrow £75k, the security would need to be £100k.
Top Tip: A commercial finance broker can arrange valuations on everything prior to submitting a proposal so the funding request is pitched at the right figure for your business.
Leg 4: Time Trading
Typically lenders favour an established business with a good history. The reason for this is obvious in that they have a tangible track record to refer to in their creditworthiness assessment.
The preference we’re seeing at the moment is a minimum of two years filed accounts.
Top Tip: Don’t worry if you haven’t been trading for two years. When doing your homework, just check that the finance broker has funders on their panel who are motivated to deal with start up or early stage businesses.
To summarise, if you’re a well-established, profitable, solvent business who can comfortably afford the debt repayments, with no adverse credit and don’t want to borrow more than 75% of the asset you’re purchasing or using as security then you should fit the bill for tier 1 credit. All the legs on your bar stool are solid.
Of course there are other considerations but using this as a guide won’t steer you too far wrong.
The good news is that if you have shoogly legs on your bar stool it doesn’t mean that access to funding is impossible.
At Breadalbane we have a panel of tier 1-5 funders from mainstream funders to challenger banks and private funders who all take a more commercial view and can tailor funding solutions to meet your requirements.
Additionally, by using our specialist knowledge to structure solutions like interest only periods, balloon payments, VAT deferrals etc, we can keep repayments to affordable levels, even if you use a lower tier funder.
Of course, there are other considerations when accessing funding and selecting your lender of choice. For example you may have 4 solid legs on your bar stool but you need access to funds quickly. In this scenario a lower tier funder may suit your requirements as they can complete faster.
There is a funding solution to meet every request and at Breadalbane we’ve access to a trusted panel of funders. Contact us to find out how we can help you seize your next business opportunity with the best finance solution.