Ever invested in anything before? Anyone ever told you to spread your risk? Believe it or not the same can apply to funding your business.
Confused? It all comes down to how much security or collateral a lender requires and how much flexibility they will allow if you need to source additional funds against varying assets.
Depending on how much security a lender requires, you may find that even if you have excess equity in a property or business, these can be tied up by your existing lender.
This blocks other lender from granting new credit lines, locking down other assets. The most common example of a lender taking a blanket security charge on your business are banks.
Banks register security and always have what's called "All monies" security clause which works like this;
Let's say you have a home loan with the bank and you then take out a separate equipment lease for your business. If you default on your lease repayment, the bank will treat this as a default across any other loans you have with the bank, meaning your home loan is now in default even though they appear not to be linked together.
I had a conversation with a potential client that needed a loan against some existing equipment as they were going through a slower sales period. To my delight she advised me that they had a company policy not to have all their loans with one lender, rather they spread them out to as many as they can where possible. I am not sure if they had been given some good advice in the past or had experienced problems having all their loans with the one lender, which in my experience may get you caught if you have some under-utilised assets on your balance sheet.
Let’s go over some of the positives and negatives
What happens when you have all your loans with one lender?
[ecko_icon alias="fa-check-circle"] Positive: Having all your loans with one lender can be beneficial as they know your business trading history and most likely have good knowledge of other assets you have within the business. Applying for extra funds from this lender can be quicker than sourcing another lender who will need to a new application to approve a loan. To add to this, you will only have one point of contact making it easier for repayments, etc.
[ecko_icon alias="fa-times-circle"] Negative: If for any reason you default on one of the loans, let’s say your mortgage, even if you think it’s separate from your business loan they will all be treated as one facility and can cause huge headaches. Furthermore, if there are some assets that can be leveraged to pay down any existing loans, you may have defaulted on these can’t be separated as the lender will consider this part of their security keeping this as collateral under the default.
What about if I separate lenders from the start?
[ecko_icon alias="fa-check-circle"] Positive: Separation if done correctly can enable you to leverage each asset on its own to its full potential for working capital. If you have a mortgage, try to select a lender that won’t need any additional security over your business assets.
If you have a home loan from a bank and are looking for a business overdraft, this will automatically tie your business to your personal asset which can be troublesome if you ever wanted to just sell your house or business then the entire debt needs to be paid out. Let’s say you have a home loan of $500,000, and you add on an overdraft for $150,000 to run the business with the same lender. If you try to refinance your home loan, you will also need to pay out the additional $150,000 to do so which could leave you stuck.
Separating the business loan with a cash flow product such as invoice financing will allow the business to stand on its own and give you the freedom to finance individual assets not locking them up.
[ecko_icon alias="fa-times-circle"] Negative: Adding other lenders will undoubtedly increase your administration. You will have several points of contact with repayments or management with more than one lender. It’s critical to know your limitations if you have back office staff who can manage this for you then you shouldn’t have a problem.
Just remember, it’s not a bad thing having everything with one lender if this is what’s required to get you the right loan. In some circumstances separation will get you further funds from assets that are under-utilised that's tied up with the one lender who may not be willing to lend you additional capital.
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