Understand the Lender’s Security and Your Risks
Lower cost financiers tend to only lend you money if you provide security. It can therefore be very difficult to protect your assets from them. Even so, there are measures you can take to limit your risk.
Reduce Risk Through Choice of Finance
This starts with your choice of financier, the way lending is structured and the security in excess of the absolute minimum which is provided. For example, if you want some machinery or a vehicle, you could obtain a loan secured by a mortgage over real estate and you could give the financier a charge over all the assets of the business trading entity. Equally, you could go to a specialist equipment financier and obtain the loan using only the goods themselves as security. Other types of lending exist which does not require the provision of bricks and mortar security.
If long term funding is needed, you have a choice of financiers who require regular or scheduled principal repayment and financiers who are happy for the loan to be interest only indefinitely. Both approaches have associated risks but the risks associated with one of the options could be more tolerable for your situation. PKF can assist working with you in obtaining the right finance for you or your business.
Personal guarantee of business borrowings is an area where risk can be reduced or eliminated. Some borrowers obtain smaller amounts from a number of lenders rather than a larger facility from a single lender. This strategy also has associated risks but they may be preferable in some situations.
Some borrowers split their lenders between those which fund privately owned assets and those which fund business assets. The ownership of personal and business assets can also be split to reduce the risk that the lender to the business will look to sell private assets.
Financiers normally continue to provide or allow lending facilities while they have confidence that you will meet future interest and principal repayment obligations. One risk management strategy is therefore obvious – provide the financier with reasons to continue having that confidence. PKF can help you provide prompt required reporting to your financier and help it have increased understanding of the business and its performance.