Business loans for a loss-making company: what lenders will still consider

There is no single test, but lenders who will look at a loss-making company usually want most of the following:

• A trading business, typically with at least one set of filed accounts, and a clear explanation of the loss
• Bank statements showing the account is run within agreed limits, without regular returned payments
• No unpaid County Court Judgments or HMRC arrears without an agreed arrangement
• Net assets that are not heavily negative, or a plan to address that, for example directors' loans that could be subordinated
• Directors willing, in many cases, to give a personal guarantee

A company that has entered a formal insolvency process is in a different position. If you are in, or proposing, a company voluntary arrangement, see our guide to finance for a company in a CVA.

Security depends on the product rather than the loss. Invoice finance is secured on the debts themselves, usually with a debenture. Asset finance is secured on the item funded. Secured loans take a charge over property. Unsecured loans, where a loss-making company can get one, usually come with a personal guarantee from the directors and sometimes a debenture. Expect a lender to take more security, not less, where the accounts are weak.

Asset finance and merchant cash advances for straightforward cases can move within days once documents are in. Invoice finance usually takes one to three weeks because the lender audits the sales ledger. Secured loans take longest because of valuation and legal work. A loss adds underwriting time, as the case usually goes to a credit team rather than an automated decision, so a well-prepared explanation saves days. These are typical timescales, not promises: each lender sets its own pace.

Illustration. A hypothetical engineering company turns over £2m and reports a £60,000 loss after taking on three engineers and a new unit ahead of a large contract. Depreciation on new machinery was £45,000, and a one-off relocation cost £30,000. Adjusted for those, the underlying business made a profit. Six months of management accounts show the contract has started and margins have recovered. An unsecured lender may still hesitate, but invoice finance against the new contract's invoices and hire purchase on the next machine both look at assets that exist today. The figures are hypothetical and each lender makes its own assessment.

Finance can bridge a gap; it cannot fix a business model that does not work. Be cautious about borrowing if:

• The business has made losses for several years and there is no specific change that will turn it round
• The new borrowing would only pay existing creditors, with nothing left to improve trading
• Repayments would only be affordable if the forecast goes perfectly
• Pressure from HMRC or other creditors is already serious

In those situations, speak to your accountant and consider independent advice from a licensed insolvency practitioner before taking on more debt. Directors of a company that may be insolvent have duties to creditors, and taking on borrowing the company cannot repay can increase personal risk. Government guidance on insolvency and company rescue is published by the Insolvency Service.

• Restructuring existing debt. Consolidating short-term facilities into one longer term can lower monthly outgoings. A consolidation loan is assessed on the same affordability tests, so it works best once trading has stabilised.
• Agreeing a payment plan with HMRC for tax arrears, rather than borrowing to clear them.
• Director or shareholder investment, which strengthens the balance sheet and reassures future lenders.
• Selling surplus assets or underused equipment.
• Tighter credit control to bring cash in sooner from customers.