If you’re a small business owner who needs to borrow, it’s a tough time. Interest rates remain at a historic low but banks are notoriously reluctant to lend following the financial crash of 2008. If your business isn’t profitable, you’re doubly disadvantaged, though alternative lenders like Cashsolv apply different criteria to small business loans. So what do you need to know about profitability and its relationship to business borrowing?
What does profitability really mean?
In simple terms, your profit is what’s left of your revenue after you’ve paid all your expenses – payroll, premises, equipment, existing borrowing and bills. A profitable business consistently has cash left over and can show a strong track record of attracting customers and carefully controlling costs.
Why are banks so risk-averse?
Before 2008, banks were broadly willing to take a chance with their small business loans and took on debts that were less than certain to be repaid. Having got their fingers burned (and having been more tightly regulated by government) they will not make the same mistakes again. When it comes to business lending, they will expect to see consistent profitability backed by a well-drafted business plan.
Why does cash flow matter?
Some banks are known for their complicated loan applications, which include reams of paperwork. In addition to proving that you’re profitable, you may need to demonstrate that you effectively manage your cash flow – a completely different matter. Even the most profitable companies can run into cash flow problems now and again, and some banks are reluctant to do business with them.
Do tax returns really count?
Traditional lenders will clearly insist that you have paid your tax on time and in full, and have no outstanding debts to HMRC. Ideally they’d also like to see that your tax returns consistently show a taxable profit, though this isn’t always essential. In fact, it’s entirely possible for a business to generate losses for tax purposes whilst remaining financially viable, due to the calculation process involved.
Do different loans have different criteria?
Absolutely. For a short-term small business loan, intended to head off a sudden problem, or asset-based finance, where you take out borrowing secured against the value of your premises or equipment, profitability is almost incidental. However, if you’re looking for longer-term finance – and particularly if you’re seeking an unsecured loan – then the performance of your business will become a key criterion.
So what are the options without a profit?
If you’re looking to borrow but your business isn’t profitable, you will probably have to think beyond traditional bank loans. A business credit card or credit line may prove easier to obtain, as well as more flexible, though the interest rates will be considerably higher. However, your best option could be an alternative lender like Cashsolv – we apply completely different criteria for our emergency business loans and asset-based finance. Invoice factoring and discounting could also be the perfect answer if you’re trying to resolve cash flow issues – this solution enables you to borrow up to 85% of the value of your invoices as soon as you issue them, with repayment being made when your customers pay you. Opt for factoring and we will take control of your debtor ledger and use experienced credit control professionals to secure early payment, whilst with invoice discounting you retain control of your own debtors.
To learn more about how Cashsolv can help, schedule a quick and confidential, no obligation call with one of our experts 01489 550 440