Applying for business loan - sole trader or ltd co?

elljay

Hi, I have recently taken over a business as sole trader, however have been advised that as a partner is working with me, that we should become a ltd co sooner rather than later. I want to apply for a business loan but am wondering if the bank would look more favourably on me as a sole trader (with plenty of good credit history on a personal basis) or as a ltd co - obviously with no history. So basically whether to apply for the loan now or wait until the ltd co is set up.

Advice please. Thanks

martindow

I think regardless of how your company is set up it is probable that the bank will want some collateral on a loan which is likely to mean your house.

elljay

Haven't got a house - the bank has also suggested they would look favourably on an application - if done properly, because of the amount of cash I have put forward to get the business going..

Just wondered whether the original question would make any difference - if not I will go ahead with setting up the ltd company then apply for the loan.

InsideInsurance

Ultimately it comes down to the individual banks and their lending policies.... you are highly unlikely to get a loan for a newly formed Ltd without any personal guarantees. The day you form the company it is only worth what its share issuance is and I'd assume that will be 2 shares at £1 each so a bank isn't likely to lend £10,000 to something that is only worth £2.

You may be able to give personal guarantees for the loan to the Ltd but then that is little different from getting a personal loan as a sole trader.

chalkie99

I have recently taken over a business as sole trader

a partner is working with me

we should become a ltd co

I want to apply

I agree with others that you will be credit checked as an individual even if you form a limited co, but there are some inconsistencies in your message which need sorting out before you proceed.

Is it your business or a partnership? If you have a partner find out about his/her credit rating before they drag you down and make sure you have written agreements about how any credit risks will be shared and dealt with.

Premier_2

elljay wrote: »

Haven't got a house - the bank has also suggested they would look favourably on an application - if done properly, because of the amount of cash I have put forward to get the business going...

So you've blown all your money setting up a business and now want some more money to be able to continue.

Which bank is this which says is going to lend on that basis? :cool:

paulwf

elljay wrote: »

Haven't got a house - the bank has also suggested they would look favourably on an application - if done properly, because of the amount of cash I have put forward to get the business going..

Just wondered whether the original question would make any difference - if not I will go ahead with setting up the ltd company then apply for the loan.

You shouldn't choose your company structure based just on the loan. Speak to your accountant or solicitor, they are best placed to give you advice not those of us on the forum who don't have the full facts and history of working with you.

Just one thing though - if you are getting a business partner wouldn't you need to be a partnership instead of a sole trader if you don't go down the Ltd route?

Any bank with any sense will want security on the loan, which means a personal guarantee backed up with assets. As a business is generally worth nothing if it fails (fixtures and fittings will lose most of their value) you usually can't borrow money using the business itself as security. There are alternatives such as EFG but have a good chat with the bank as they usually won't take it further if you can't provide security.

elljay

Premier wrote: »

So you've blown all your money setting up a business and now want some more money to be able to continue.

Which bank is this which says is going to lend on that basis? :cool:

No - we can continue fine - we want to grow.

And it was NatWest

Premier_2

elljay wrote: »

No - we can continue fine - we want to grow.

And it was NatWest

So the bank agrees that your business at present has a realisable value?

If so, they should accept this as collateral.

smartiedriver_2

Premier wrote: »

So the bank agrees that your business at present has a realisable value?

If so, they should accept this as collateral.

A business is not tangible security for a loan. Tangible security would be cash, property, shares etc.

Some banks will lend up to a certain limit without requiring security.

For a bank, it makes no difference if you are a sole trader, a partnership or a limited company. They will be interested in the business history (audited accounts), viability going forward (cash flow projections) and affordability (current management information).

If you genuinely have no security to offer, (as opposed to having it but not wanting to use it to secure the borrowing) then the Govt EFG scheme (Enterprise Finance Guarantee) may be of use to you. This is where the Govt secures 75% of the lending, leaving you to provide security for the remaining 25%. It is not available to all business, not all banks promote it, and it costs more because you hvae to pay a 2% premium to BIS (the Govt dept that runs it) on top of the Bank's interest.

But it is out there for those that need it.

Premier_2

smartiedriver wrote: »

A business is not tangible security for a loan. Tangible security would be cash, property, shares etc. ...

That's why I said a realisable value

i.e. if the business stopped today, the value you could get by selling the real assets e.g. stock (at wholesale value), scrap metal value of tooling, distress value of business premises (if any) etc.

Banks lend against this type of value all the time.

If there is no realisable value, see my earlier post