New lending rules require lenders to more closely assess whether a borrower can afford their small business loans. However, it has emerged that many mainstream lenders have already implemented more rigorous checks which are likely to see more people refused for the loan they need.
One of the key changes is that lenders are ‘stress testing’ borrowers against interest rate rises. According to an accountant in london this means that unless you can demonstrate that you can afford your business loan when interest rates rise, you may have your application refused.
Could you afford your business loan if rates increased by 3 per cent?
The Daily Mail reports that ‘under a major crackdown, lenders must ‘stress test’ business loan applicants to see if they will be able to afford potentially higher monthly costs.’
As well as checking affordability more closely than ever, potential borrowers must also be able to prove that they will still be able to afford their small business loan even if the cost of their repayments never rises as high as their lender predicts.
Lender must assess a business loan’s affordability over the five years after the loan is made. At present, the market expects the Bank base rate will be 3 per cent in five years but lenders are using rates of up to 7 per cent to gauge affordability.
The new guidelines are already being followed by most of the country’s big lenders.
Many businesses can easily afford the repayments on their business loan while the Base rate is at 0.5 per cent, the point of these rule changes is that borrowers should still be able to meet their repayments when interest rates inevitably rise.
Changes to affordability checks also set to cause applicants some problems
As well as ‘stress testing’ borrowers against future interest rate rises, changes to affordability checks are also intensifying. Under the new system, lenders will take a closer interest in other business expenditure.
Seek your accountants help if you need your small business loan approved quickly
A knock-on effect of the rule changes is that lenders are also taking much longer to process business loan applications and this is a situation which looks set to continue.
Anecdotal evidence suggests that it is taking lenders up to four weeks to approve a business loan at present which could be a problem. In this situation it can pay to speak to your accountant.