What are the most common hurdles when it comes to lending for a business – and how should companies utilise financing?
Securing lending for a business mortgage can be a critical step for many companies looking to expand their operations, acquire new premises or manage cash flow more effectively. But despite its importance, many business owners face seemingly significant hurdles in the process. Such challenges can often lead to a negative perception of taking on a business loan, also creating a stigma that suggests financial weakness or poor performance.
However, it is important to understand that lending for business, particularly in the form of a business mortgage, is a common and often necessary step for stability. If it is then used responsibly, it can turn into a driving force for growth and success. In this article, we explore the typical obstacles that business owners encounter when attempting to secure a business mortgage, why these issues arise and how to navigate them successfully.
Understanding the financial landscape
A business loan of up to ยฃ25,000 is unsecured. Should a higher amount be required, security is needed by the lender, which is where a business mortgage takes over. Business owners often take this path as economic conditions get tougher. But in a stable or improving economic environment, when the expectation of interest rates is downward or even if you have been deliberately cautious, the confidence of both lenders and borrowers starts to build.
Although lenders are likely to become more enthusiastic about providing finance in improving market conditions, they will still need to heavily scrutinise the financial history of both the business and its owners. Reviewing credit scores, financial statements, tax returns and other financial documents are done as a matter of course. This examination can be tough for newer businesses that lack a substantial credit history. Without a proven track record, assessing a startupโs ability to repay the loan is difficult. Even established businesses with consistent cash flow or past financial difficulties may struggle to appear as reliable owners.
Business owners need to improve their creditworthiness from day one. Newer companies can establish a robust credit history and demonstrate financial stability to lenders by responsibly using credit products, clearing existing debts and implementing effective cash flow management practices.
Mitigating industry risk
A strong credit score, regardless of your stage of business, doesnโt just help with securing a new commercial mortgage or loan. It can also be beneficial to bring on a new supplier, securing new business or enhancing the flexibility of your existing credit terms. This is crucial, because the industry specific decisions that are made for your business also affect the approval process. Indeed, lenders consider certain industries to be higher risk due to economic, seasonal and regulatory challenges, with hospitality, retail and construction sectors potentially more susceptible.
Diversifying your income streams reduces dependency on a single revenue source, making the business more resilient to industry fluctuations. This doesnโt mean you need to diversify into a new sector, but strategies such as expanding the product line or shifting into new geographic locations can help reduce your risk profile. Streamlining operations, cutting unnecessary expenses and investing in appropriate insurance lowers risk and can also improve your debt-to-income ratio, while refinancing existing debt to secure better terms could also help.
Overcoming the problem of collateral
Collateral also poses a significant challenge. Lenders typically require collateral to secure a business mortgage, which might include the property or other business assets being purchased. Small businesses or startups often lack enough valuable assets to offer, and those with existing loans may have already pledged their available assets. This leaves many businesses in a bind, unable to meet the collateral requirements despite having viable business models and growth potential.
It’s key that business owners regularly focus on maximising the value and availability of their collateral. Regular asset appraisals ensure accurate valuations, and expanding collateral options, including using personal assets or seeking additional business assets, can strengthen the collateral offering. Taking out an unsecured business loan, which does not require collateral but typically comes with higher interest rates, could also be considered.
Destigmatising the commercial mortgage
There are many positive reasons why a company may need to take out a business mortgage. Itโs essential to shift the perception that seeking a business mortgage is indicative of financial trouble. Many successful businesses utilise financing to fuel growth, manage cash flow or seize new opportunities.
In 2023 the total value of SME bank loans in the UK reached ยฃ59.2bn โ the third equal highest on record, with 69% of approved funding cash flow related. Every business that has needed funding will have come up against challenges but will also have shown their ability to overcome them. Understanding that these challenges are common can help normalise the process and reduce any associated stigma.
Business leaders should consider engaging with other business owners and learn from their experiences. This can provide valuable insights and reduce feelings of isolation. Donโt shy away from speaking with the key stakeholders in your business โ inform them about the strategic benefits of business mortgages to shift any negative perceptions and foster a more positive view. Using the expertise of mortgage brokerages and financing advisers can be a game-changer for businesses facing these challenges and seeking a tailored solution.
Can I get lending for my business? Yes, you can. Remember, securing a business mortgage is not a sign of failure โ itโs a strategic move towards growth and stability. As discussed above, the process has its challenges, not least the application itself. But by understanding these hurdles and implementing strategic and impactful solutions, with professional support, navigating the lending landscape becomes much easier and empowers owners to move forward with confidence.