Will a director's personal debts affect the chances of securing a business loan?


1

I am the sole director of a UK Ltd company (about 1 year since reg and turned over about £60k, no debts, loans etc)

Before setting up the company i accrued a debt (which i am slowly paying off) from a previous business as a sole trader that went tits up due to the recession (trade died, still had to pay lease etc etc...)

I am looking to significantly expand the operations of the new company and am looking for a sizable corporate loan in order to do this.

So as per the title, will my personal debts effect my chances of securing a business loan for the Ltd company?

If it makes any difference... HSBC, looking for £150k

Finance

asked Aug 28 '13 at 05:26
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Darkcat Studios
190 points
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1 Answer


1

In the States, (as im sure with almost any country) when you apply for a business loan on a corporate level, their is always a person or persons who are financially responsible for the loan called indemnitors.

A corporation has too much protection from lawsuits for a bank to feel safe giving money to it. For example say I own XXX INC, and HSBC gives my company 10 million dollars for working capital. If the deal was just between HSBC and XXX INC then I could easly burn through that money and HSBC would have no recourse to go after their losses. Usually they put someone (CFO, CEO) on the hook with things. Banks also will put leins on propery and even inventory if that is why you are getting a loan to grow your business.

With all that, you are still better going to a bank versus an off the street investor for your capital needs. Although the bank will look at your personal credit to make sure you qualify to be a signer on the loan, they are far more interested in making sure the business can pay back the loan than you.

To take the example further, I own XXX INC (in business 3 years with a good track record) but need 1million for inventory. My credit is not great, and I really only have a tiny bit of equity in my house. Bank would be more interested in making sure that my business can use the 1million dollars to repay the loan than what happens if the business fails. The personal signer on the loan is really an insurance policy where the bank knows you are putting your balls on the line in case the INC goes bad. Also protects them from theft and fraud in case you funnel their loan to the personal side of things.

Dont worry about it so much. If you are super worried, bring on a CFO (give them a small share) and use them as the signer for the loan. Most USA banks allow this behavior.

answered Aug 28 '13 at 10:44
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Frank
2,079 points

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