Applying For Business Loans During Financial Hardship

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Key Takeaway Table

Key Point Description
Should You Apply for Business Loans During Financial Hardship?
If you are genuinely suffering financial hardship, you should not take on a loan. However, when your business is struggling financially but has a turnaround in sight, you can apply for a loan after thorough consideration. On one hand, obtaining a loan can get you the funds you need to recover and grow. On the other hand, a new loan can be an additional burden, and if not paid on time, it can lead to serious consequences.
Understanding the Lender’s Perspective
Lenders look for two factors when approving a loan for a business in financial trouble. They want to see your capability to repay, and they want to see what led to the financial hardship and how you plan to recover from it.
Important Strategies
Businesses can get a better chance of loan approval by uncovering the root cause of the financial trouble and making a clear plan to recover. Businesses can also offer additional security. It's also beneficial to approach alternative lenders since they have more relaxed criteria.
Navigating the Application Process
When applying, businesses must maintain open and honest communication with the lender. It's important to emphasise how the business can effectively repay the loan on top of its current obligations. Additionally, they must highlight their recovery plan and all other efforts to overcome the current financial hardship.

Applying for a business loan is challenging enough during the best of times. However, during financial hardship or if you’re unable to meet your current obligations, you should not take on further debt obligations.  However, if a valid turnaround is in sight, with the right approach and strategies, businesses with cash flow challenges can secure the loans they need to turn their situation around.

Should You Apply for a Business Loan During Financial Hardship?

Loans are a huge financial undertaking for businesses and individuals alike. During times of financial hardship, you should not take on a loan. However, if you’re in a challenging cash flow situation and are seeking to obtain a loan to avoid financial hardship, loans are something you can consider. However, the decision to obtain one must be made only after carefully assessing its pros and cons:

Pros of Seeking Loans

  • Cash Flow Management: Loans can provide the necessary cash flow to keep the business operational, allowing it to meet its immediate financial obligations such as payroll, rent, and supplier payments.
  • Opportunity for Growth: Loans can offer a business the chance to invest in opportunities that could lead to growth and recovery.
  • Debt Structuring: A well-structured loan could offer better terms and lower interest rates compared to existing debt, providing a more sustainable path forward.
  • Avoiding Extreme Consequences: Loans can be a lifeline to avoid the worst-case scenarios of liquidating assets or going into administration.

Cons of Seeking Loans

  • Increased Debt Burden: Taking on more debt increases the financial burden on the business. If the business’s revenue does not improve, this can lead to a vicious cycle of debt.

  • Risk of Default: If the business fails to turn around, there’s a risk of defaulting on the loan, which could lead to severe consequences, including legal action and loss of assets.

  • Stricter Terms and Conditions: Lenders may impose stricter terms and higher interest rates on businesses they perceive to be a higher risk, which could further strain the business’s finances.

  • Impact on Credit Rating: Taking on additional debt and any potential issues with repayment can negatively affect the business’s credit rating, making future borrowing more difficult and expensive.

Understanding the Lender's Perspective

When a business is experiencing financial difficulties, lenders will naturally be more cautious when evaluating loan applications. They are primarily concerned with two key factors:

To address these concerns, businesses seeking loans during times of distress must be prepared to present a compelling case that demonstrates a clear path back to financial stability.

Strategies for Obtaining Loans During Challenging Cash Flow

Despite the additional hurdles, businesses facing cash flow challenges can still potentially secure the loans they need by implementing the following strategies:


Identify and Address the Root Causes 

Lenders will want to understand the specific factors that led to challenging cash flow, such as economic downturns, operational inefficiencies, or management missteps. Developing a well-researched plan to address these issues head-on can instil confidence in the lender.



Implement a Comprehensive Turnaround Plan

Prepare a detailed turnaround strategy that outlines the concrete steps the business will take to regain financial stability, such as cost-cutting measures, revenue-generating initiatives, debt restructuring, or operational improvements. Demonstrate that the plan is realistic and achievable.



Seek Out Alternative Lenders

It can be very challenging to get loan approval from traditional banks if your business is experiencing cash flow difficulties. Thankfully, there are non-bank lenders, including private lenders, that may be amenable to lending despite your situation. However, you must consider that interest rates are higher and you are likely to get less favourable terms. It’s crucial to weigh the pros and cons before applying.



Demonstrate Effective Cash Flow Management

Lenders will want to see that the business has a firm grip on its cash flow, including the ability to prioritise and manage debt obligations. Provide detailed financial projections and evidence of cost-cutting measures to bolster this aspect of the application.



Offer Additional Security

While not ideal, offering additional security, such as personal assets or property can help mitigate the perceived risk for the lender.



Navigating the Loan Application Process

Unless applying for a private loan (like a second mortgage) during a period of challenging cash flow, businesses should be prepared for a more rigorous and scrutinised application process. Key steps include:

Transparent Communication

Proactively engage with the lender, providing full disclosure about the company’s challenges and the steps being taken to address them. Hiding information or downplaying the issues will only undermine the lender’s trust.

Detailed Financial Documentation

Compile comprehensive financial statements, cash flow projections, and any other relevant documentation that demonstrates the company’s current financial position and the viability of the turnaround plan.  Unsecured lenders will analyse cash flow through bank statements and place greater emphasis on this than other documentation.

Emphasis on the Recovery Strategy

 Clearly articulate the specific actions being taken to overcome the financial hardship, including timelines, milestones, and the expected impact on the business’s performance.

Highlighting Mitigating Factors

Identify and emphasise any positive factors that could offset the perceived risks, such as a strong management team, valuable assets, or increased sales.

Persistence and Patience

Understand that the loan approval process may take longer and require additional rounds of scrutiny. Demonstrate persistence and a willingness to provide any additional information the lender may request.

To Sum It Up

Obtaining business loans during periods of financial hardship can be a daunting challenge, but it is definitely possible. By understanding the lender’s perspective, implementing comprehensive turnaround strategies, and leveraging available government support programs, businesses in distress can improve their chances of securing the financing they need for a successful recovery.

Securing Funding During Financial Hardship

If your business is going through a rough time financially, it may be challenging to secure funding. We can help you navigate this process so you can get the help you need to get your business back up and running. We’ll direct you to lenders willing to work with you and give you the best possible terms for your situation.

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