Living with the Loan

The best opportunity to find the correct option is before entering any agreement, not after. Do not make a quick fix today and set up for an expensive headache for years to come.

Our advice is that you to adopt a requirement and resource framework. For example, if you need cash for 24 months, why take a 12–month fixed-term loan? You would not be matching your requirement to the correct resource and, you will be creating more work and more risk as you will need to refinance after 12 months.

Break down what the requirements of your task are. Then find or adapt an existing resource to meet your requirement.

For transparency and to get you into the BorrowingWell frame of thinking, we’ll break down the requirements into the following sections:

  • How much do you need?
  • For how long?
  • Do you have a good reason for needing it?
  • Justify it as a good credit decision.

Here are some points for you to consider:

Loan Value

The amount should be a value that is sufficient for you to execute your stated objective.

In my credit committee days, I recall having to refuse a business credit because the amount they applied to borrow was not enough to keep the business going. Even after the applicant had forecast receipt of loan proceeds, they were still heavily overdrawn.

The applicant was asked to provide details of their overdraft facility. They disclosed that they did not have one. When challenged that the loan value was not sufficient, the applicant stated that they would still need a second round of finance from an as yet unknown party.

I’ll let you guess if they got a yes, no, or a comeback later?

Loan Facility Options

Loan value and loan facility are the two most important choices.

As with loan value, you should focus on finding a resource that is suitable for your requirement.

In other real-world examples of poor decisions being costly, I recall two businesses that became insolvent due to poor facility choices. Both were for the inappropriate use of a bank overdraft and, in both cases, the owners lost their businesses.

In both examples, the businesses relied heavily on their overdrafts for their day-to-day working capital requirements. In both cases, there was no realistic near-term route out of debt.

The problem they both faced was their banks pulling their overdrafts with no notice. Both businesses folded soon after. Both businesses happened to have many other issues but, what caused their deaths was preventable.

Generally speaking, the bank can remove the overdraft facility without notice and the term is usually only a year. These factors make overdrafts inappropriate for anything other than short term use.

If you adopt BorrowingWell’s resource and requirement framework, using an overdraft in both cases would not be appropriate. Both examples require something longer term and fixed.

Lack of planning is what drove both these companies out of business. They both chose the easy option of leveraging the overdraft first. It is understandable and could be forgiven. What is unforgivable is not replacing the overdraft facility with a resource fitting of the requirement.

How Life May Change With the Loan

You will most likely have some level of reporting requirements that you may not have had to do in the past, or the reporting timeframe could be shorter. Your business has to be capable of producing this and doing so on time, as its omission could cost you dearly.

The cash you collect from clients may need to go to a bank account controlled by the Lender.

If you have a personal guarantee (PG), your losses are no longer limited to the share capital of the business. You should consider the impact this has on your personal life.

Companies House Charge Registration

The Lender is stated on your Companies House profile as part of the charge registration. This information is public record and easily searchable.

Stakeholders may have preconceived notions as to a hierarchy of Lenders, in much the same way they make a judgment about you based on the car you drive. Whether it is right or wrong to judge is for debate, but you should be aware.

You may or may not care about this but what you must consider is the impact any judgment from suppliers or customers or any other stakeholders may have on your business.

If a potential customer or supplier saw a high-cost Lender had a charge registered against your business it may be enough to turn them off you.

Can you repay a business loan early?

Are there forecast scenarios where you can repay early? Many facilities have early repayment charges but, plenty of others don't.

Peer-to-peer business loans do not have early repayment penalties. But, be careful as it will need to be under what is known as a 36H agreement. If the loan is funded by institutional rather than retail investors, it may not be subject to 36H. There's an easy way to find out though, you just have to be smart enough to ask.

Do not overlook calculating the opportunity gain you could enjoy, or the opportunity cost you'll regret.