Can I Get a Business Loan After a Previous Default?

Yes, potentially.

A previous default on a loan or other credit agreement doesn't necessarily prevent a business from borrowing again.

However, lenders are likely to take a previous default seriously because it provides direct evidence that a borrower has previously failed to meet its agreed credit obligations.

The important questions are usually when the default occurred, what caused it, how much was involved, whether the debt was ultimately repaid and how the business has conducted itself since.

A business that experienced a temporary financial problem several years ago and has subsequently traded successfully can present a very different risk from one that has recently defaulted and remains under financial pressure.

What does defaulting on a business loan mean?

The precise definition of default depends on the terms of the finance agreement.

A default can arise when a borrower breaches an obligation under its agreement with a lender.

Failure to make scheduled repayments is an obvious example, but finance agreements can contain other events of default.

Depending on the agreement, these might include:

• failure to make payments when due;

• insolvency;

• providing materially incorrect information;

• breaching certain contractual obligations;

• enforcement action by another creditor; or

• other specified events.

For the purposes of a new loan application, lenders are likely to be particularly interested in previous payment defaults and circumstances where another lender suffered or was at risk of suffering a financial loss.

Does a previous default automatically mean I will be declined?

No.

Some lenders may have credit policies that automatically exclude certain previous defaults.

Others use more detailed underwriting and consider the circumstances.

A lender might look at:

• how long ago the default occurred;

• amount involved;

• type of borrowing;

• reason for the default;

• whether it was eventually repaid;

• whether legal or enforcement action was required;

• whether a personal guarantee was called upon;

• whether there have been further credit problems; and

• current financial performance of the business.

The existence of a default is therefore important, but it isn't always the end of the assessment.

How much does the age of the default matter?

Potentially, a great deal.

A default from several years ago may have less relevance if the business has demonstrated satisfactory financial conduct since.

For example, a company might have experienced significant difficulties during a particular period but subsequently:

• returned to profitability;

• rebuilt its cash reserves;

• repaid other borrowing successfully;

• maintained satisfactory bank conduct; and

• avoided further adverse credit.

That subsequent history provides evidence that the previous problem may have been temporary.

A default that occurred only recently is more difficult because there is less evidence that the underlying problem has been resolved.

Why did the business default?

This is one of the most important questions.

Defaults can happen for very different reasons.

A business may have lost a major customer unexpectedly.

It may have suffered a substantial bad debt.

There may have been a temporary interruption to trading.

A large customer may have paid significantly later than expected.

The company may simply have taken on more debt than its cash flow could support.

These situations don't necessarily represent the same credit risk.

A lender will want to understand what caused the default and whether those circumstances are likely to happen again.

Does it matter whether the previous lender was repaid?

Yes.

There can be a significant difference between a temporary default that was subsequently brought up to date and a default that resulted in the lender suffering a permanent loss.

For example, the borrower may have:

• caught up the missed payments;

• repaid the facility in full;

• agreed a repayment arrangement;

• settled the debt for less than the full amount;

• entered an insolvency process; or

• left part of the debt unpaid.

Each outcome provides different information to a prospective lender.

Repaying the previous lender doesn't erase the fact that a default occurred, but it can demonstrate that the borrower ultimately dealt with the liability.

What if I agreed a settlement with the previous lender?

A settlement can still be relevant.

If a lender agreed to accept less than the full contractual amount owed, a new lender may want to understand why.

The fact that the matter has been resolved is positive compared with an outstanding unpaid debt.

However, a settlement involving a substantial write-off also indicates that the previous lender suffered a loss.

The new lender will therefore consider both aspects when assessing the application.

What if the default was caused by a temporary cash-flow problem?

Explain what happened.

Temporary cash-flow problems are common in business, but the lender needs to understand why the company couldn't manage the shortfall without defaulting.

For example, if a major customer unexpectedly paid a £100,000 invoice 60 days late, that might explain a temporary liquidity problem.

The lender may then consider whether:

• the customer subsequently paid;

• the company remains dependent on that customer;

• cash reserves have improved;

• working-capital management has changed; and

• similar payment delays would cause another default.

A credible explanation should therefore address both the cause of the previous problem and what has changed since.

What if I defaulted because the business had too much debt?

This is likely to be particularly relevant to a new lender.

If excessive borrowing caused the previous default, the lender will want to establish why taking on another loan won't recreate the same problem.

It may look closely at:

• current outstanding borrowing;

• monthly or weekly debt repayments;

• revenue;

• cash generation;

• available liquidity; and

• how much additional repayment the business can realistically support.

Simply refinancing or adding borrowing doesn't necessarily solve an underlying affordability problem.

The current debt position therefore needs to be sustainable.

Does it matter what type of credit I defaulted on?

Potentially.

A default on a business loan can be particularly relevant when applying for another business loan because it directly relates to the borrower's previous ability or willingness to repay similar credit.

However, lenders may also consider defaults relating to:

• overdrafts;

• asset finance;

• invoice finance;

• credit cards;

• supplier credit;

• commercial mortgages; or

• other financial obligations.

The lender will consider the circumstances rather than necessarily treating every type of default identically.

What if the default was personal rather than against the company?

That is a different situation.

A limited company is legally separate from its directors.

However, SME lenders may also consider the personal credit history of directors, shareholders or proposed guarantors.

A previous personal default can therefore still be relevant, particularly where the individual is providing a personal guarantee.

The lender may consider the age, amount and circumstances of the personal default alongside the financial position of the company.

What if the previous company defaulted but my current company is different?

This requires more context.

Suppose a director previously owned a company that defaulted on business finance and later established or acquired another company.

The new company is a separate legal entity, so it hasn't itself defaulted on the previous loan.

However, a lender may still consider the director's previous business history when assessing the new application.

The relevance is likely to depend on factors such as:

• how closely the director was involved in the previous company;

• why that business failed or defaulted;

• whether personal guarantees were involved;

• how long ago it occurred;

• whether creditors were ultimately repaid; and

• performance of the current business.

A previous business failure doesn't necessarily mean that every future business operated by the same director is uncreditworthy.

But the lender may reasonably want to understand what happened.

What if the previous default was with the lender I am applying to again?

This can be more difficult.

The lender will have its own records of the previous relationship and may place considerable weight on how the account was managed.

If the previous default was resolved quickly and the lender was ultimately repaid in full, it may potentially be willing to consider another application.

If the previous facility resulted in a substantial loss or difficult enforcement process, the lender may be much less willing to lend again.

Individual lender policies will differ.

Can I get an unsecured business loan after a default?

Potentially.

Because unsecured lending doesn't have specific asset security, the lender is likely to scrutinise the previous default and current affordability carefully.

A strong application might demonstrate:

• established trading history;

• consistent current revenue;

• adequate cash generation;

• satisfactory recent bank conduct;

• manageable existing borrowing; and

• no recent repetition of the previous credit problem.

The more recent or serious the default, the more difficult unsecured borrowing is likely to become.

Would providing security help?

It can.

Suitable security can reduce the lender's potential loss if the borrower subsequently defaults.

This may allow some lenders to consider an application that they wouldn't accept on an unsecured basis.

But security doesn't solve an affordability problem.

If the company cannot reasonably support the proposed repayments from its cash flow, the presence of property or another asset shouldn't by itself make the loan appropriate.

Will a previous default mean a higher interest rate?

Possibly.

Where a lender considers the previous default to increase the risk of lending, that can be reflected in its terms.

The lender might:

• charge a higher rate;

• reduce the amount offered;

• shorten the term;

• require security;

• require personal guarantees; or

• decline the application.

The outcome will depend on the seriousness of the default and the lender's own credit appetite.

How long should I wait after a default before applying?

There is no universal waiting period.

The more useful question is whether there is enough evidence to demonstrate that the circumstances that caused the default have changed.

Applying immediately after defaulting on another loan can be difficult because the new lender may reasonably question why it should expect a different outcome.

As time passes, satisfactory subsequent financial conduct can provide evidence that the problem was temporary.

That could include:

• consistently meeting other repayments;

• rebuilding cash reserves;

• improved profitability;

• stronger revenue;

• reduced debt; and

• no further adverse credit.

The quality of that evidence can matter more than reaching an arbitrary number of months.

Should I disclose a previous default?

Yes.

If a lender asks about previous defaults or adverse credit, provide accurate information.

Relevant credit information may also become apparent through credit searches, bank statements or other underwriting checks.

It is generally better to explain the issue upfront.

A useful explanation should cover:

What happened?

When did it happen?

How much was involved?

Was the lender eventually repaid?

What caused the problem?

What has changed since?

This gives the new lender the information needed to make a properly informed decision.

What will a lender look for after a previous default?

A lender is likely to pay particular attention to the company's subsequent financial conduct.

For example:

• Are existing loan repayments being made on time?

• Are Direct Debits regularly being returned?

• Does the company maintain reasonable cash balances?

• Has debt increased or reduced?

• Is turnover stable?

• Is the business profitable or generating sufficient cash?

• Are there new CCJs or other adverse credit events?

• Are HMRC liabilities being kept under control?

The objective is to determine whether the previous default was an isolated event or part of a continuing pattern.

Can a strong business recover from a previous default?

Yes.

Businesses can experience periods of genuine financial difficulty and subsequently recover.

A previous default remains relevant information, but lenders should also consider what has happened since.

An established business that experienced difficulty three years ago but has since demonstrated strong trading, adequate liquidity and satisfactory repayment conduct can present a materially different risk today.

That is particularly relevant where a lender uses manual underwriting rather than relying solely on automated credit rules.

Applying for a business loan after a previous default with Adelpha Capital

Adelpha Capital provides business finance to established UK SMEs.

A previous default doesn't necessarily mean that an application cannot be considered. Where adverse credit exists, we can consider the nature, severity, timing and circumstances of the issue alongside the current financial position of the business.

Our assessment also considers factors including turnover, cash flow, recent bank conduct, trading history and existing borrowing.

If your business has experienced a previous default and is now looking for finance, you can apply online or contact the Adelpha Capital team to discuss your requirements.