Norman Carson, director of business development at Boost Capital, explains arranging loans using an SME’s balance sheet as the engine for repayment can help SME’s get over hurdles placed by more traditional lenders.
Credit scoring can be the bane of small business owners’ lives, as those seeking capital from the banks in recent years have often found. All too many have had bank loan applications flatly rejected on the basis of one of these automated and unforgiving checks.
The big financial institutions’ reliance on the credit reference agencies has only become greater since the economic downturn, with many SMEs finding themselves deprived of much-needed funding due to a low credit score or slightly questionable report.
Of course, any lender needs to have a sense of the health of an enterprise before it agrees to hand over funds. That’s just good business sense. But we at Boost Capital take the view that assessing a company’s well-being purely via these crude measures is both unfair and unrepresentative of the real state of affairs.
We want to get an overall picture of the company, who runs it and how they’re faring in the present, rather than reading between the lines of historic data. That’s why we opt to look at monthly sales, business that’s in the pipeline and a company’s ability to generate revenue today as a more accurate indicator of how it’s doing and whether we should lend it money.
That’s not to say we don’t use credit checks at all. A personal credit scan of the individual making the application is part of our approval process, but the result isn’t the determining factor in whether a company is successful in its attempt to borrow. We recognise that many brilliant and successful entrepreneurs have had a less than perfect credit history at one time or another. Unlike the banks, we don’t automatically regard such people as a bad risk and undeserving of help.
Many company owners are amazed to discover that a potential lender wants to go beyond the ‘computer says no’ model and see what really makes them and their enterprise tick.
Another advantage of the type of short-term loan we offer at Boost Capital is that it won’t show up on a business owner’s credit report in future, unlike standard bank loans. This means firms can pursue other financing opportunities and protect their credit status for the future. Even though we don’t hold with the idea of the credit report as the ultimate arbiter of a business’s health, we know that other lenders do.
Credit checks are designed to give an indication of a business or individual’s likely behaviour. To be slavish to this information is like saying that because someone once had a car accident, he or she will almost certainly have one in the future, which is nonsense. There are always circumstances to be taken into account and it’s necessary to put things in context. To continue with the car analogy, if there were an accident, was the person driving recklessly or, in fact, were they unfortunate in hitting black ice?
Similarly, a business might have damaged its credit score by defaulting on a single payment because it was left out of pocket by a customer failing to pay an invoice. Context is everything here and that’s what we seek to establish when we look at a new loan applicant.
In many respects we do things differently at Boost Capital. As said, we don’t just depend on credit references to discover how reliable the business is. We don’t seek security against our loans, another thing that causes many business owners some surprise when they first discover it. And we don’t believe in treating all SMEs as if they were the same. They’re plainly not. There’s nuance and a need for judgement in every deal we do. I just hope more businesses come to realise that there are still a few lenders who think that way – and Boost Capital is one of them.