Here a specialist in finance responds to frequently asked questions on the subject.
These cover business finance FAQs and more general issues.
What sort of things can business finance be used for?
Typically, virtually anything.
Of course, some lenders may have business areas they specialise in and they may be reluctant to lend for purposes they are less familiar with.
Generally speaking, providing that thing you are purchasing is legal and clearly related to the progression of your business, you may be able to secure business finance to assist.
A big factor in securing finance is usually whether or not you and your business are assessed as being an acceptable risk in terms of being able to afford the repayments.
What does “acceptable risk” mean in terms of repayments?
Any provider of finance will wish to ensure that there is a high probability of them being able to recover, in line with the loan agreement, any sums they are advancing.
As part of reviewing an application for business finance, they will typically look at a number of factors surrounding both the purpose of the loan and the nature of the person/business applying. A number of elements of that will result in the production of what’s called an overall “risk profile” for the application.
If that risk profile is within the acceptable limits, the money will usually be provided. If it isn’t, they may require additional formalities to be completed or decline the application.
Where does a credit risk assessment fit into this?
The specifics here may vary depending upon the size and nature of the business concerned. What might be required for sole traders or small partnerships is not necessarily the same as the processes required for a PLC.
Typically, a potential lender will be looking to see two things when considering a request for a business loan:
- how the business has performed historically and its financial health today. That usually entails looking at things such as annual accounts;
- possibly individual credit risk assessments for the business owners in the case of sole traders and smaller partnerships. This might typically be conducted through one of the major credit risk agencies.
It is worth commenting here that business lenders are inclined towards approving applications, rather than trying to find justifications for refusing them.
Is business finance available for start-ups?
This is one of the most commonly asked business finance faqs – but it’s not necessarily an easy one to definitively answer.
In very general terms, lenders that advance finance to companies that are already up and running tend to be different to those who are providing start-up finance for “greenfield” enterprises.
The degree of risk for a lender in the case of an entirely new and unproven business is typically higher than in the case of an existing and successful business. So, understandably, these tend to be two different markets.
However, start-up business finance may well be available from a variety of sources.
Is business finance only advanced for asset acquisitions?
No, it can be made available for qualifying non-asset related reasons.
For example, that might entail situations where there is a short-term cash flow problem and some form of bridging finance is required.
Will people lend to businesses that are in trouble?
You may be surprised to know that the answer to that one is “yes” but an important caveat is that the business must be seen as being viable overall.
Some types of business problem may put the enterprise at risk but for short-term or simple misfortune-of-timing reasons. Examples might include where a major client has entered into bankruptcy and failed to pay their debts, meaning that the supplier company is at risk even though the business is successful in general terms.
Of course, if the business applying for finance is fundamentally flawed and is never likely to constitute a successful enterprise in future, irrespective of what actions are taken, lenders may decline to advance funding.