More than a year into this global pandemic and the world is still reeling from its effects. Businesses have shut down. Lives have been lost. Lifestyles have changed drastically. The world’s previous normal was challenged and found wanting. A new normal is forced upon us. And included in this are bad credit business loans.
The majority of businesses were affected by the pandemic. Tourism and its allied industries were devastated by the lockdowns. Logistics took a hit as restrictions inhibited the movement of goods and services. Foot traffic in commercial spaces dropped drastically. Hotels and restaurants emptied out. Business owners cry out on social media complaining of sinking deeper in the mire. Only a handful have managed to thrive successfully. Among them are food delivery services, pharmaceuticals, and health services.
With all those businesses affected, some of which with existing loan obligations, their repayment capacity towards their lenders has taken a hit to various degrees. Some businesses were forced to close down. Others downsized to streamline their operations. The banks who lent to these businesses were left mostly helpless with mounting defaults and an increasing portfolio of bad debts.
For most of the businesses, the circumstances were beyond their control. With no way out, they have to swallow the bitter pill and live with a bad credit score. Bad credit business loans are here. The question is, how does everyone adapt to this reality? Before we answer this, let us first review how lenders typically evaluate a potential borrower.
The 5 C’s of Credit
Banks or lenders typically look into the 5 C’s of Credit (character, capital, capacity, collateral, and conditions) when evaluating a credit relationship with a borrower. Bad credit puts a question mark on the first of those 5 C’s–character. However, there is a way to address this by enhancing one or more of the other discussed C’s, the easiest being collateral. Collateral is an asset offered by a borrower to the lender as security in a pledge of repayment of a loan. In the event of borrower default, the lender has the recourse to forfeit the pledged security in its favour as a form of repayment.
The acceptability of the security offered as collateral depends on the risk appetite of the lender. More conservative lenders tend to require more liquid instruments such as cash, cash instruments, marketable securities and such. On the other end of the spectrum, lenders could also provide financing to a borrower even without requiring security at all should the lender’s overall evaluation of the borrower suggest an acceptable credit risk. Somewhere in between that spectrum are loans secured by Real Property, that is, a piece (or pieces) of real estate that the borrower owns. There are two ways for the lender to secure a real estate property from a borrower: one, through a mortgage loan (link here), and, two, caveat loans. Both are normally short-term business loans which are considered secured business loans because they are bound by an agreement wherein the borrower agrees to offer his/her real estate property (or properties) as a form of reassurance to the lender that he/she will repay the loan. Caveat loans are one method where caveat lenders approach short term business loans requirements by borrowers.
They are covered by a Caveat Agreement. The term “caveat”, coming from the Latin term that translates to “let him beware”, means that a caveat acts as a warning for third parties that the lodging party (known as the “Caveator”), in this case, the Lender, has an interest in the land. A caveat prevents the owner of the land, who in this case is the Borrower, from transferring, selling, or otherwise dealing with the property without the prior consent of the Caveator or Lender.
A caveat can be lodged without the consent of the owner of the land (known as the “registered proprietor”), but the person lodging the caveat is liable for legal and financial penalties if a Court finds that there is no “caveatable interest” (a valid interest). Therefore, the Caveator or Lender must exercise a large degree of caution before lodging a caveat. This should also always be lodged by a Solicitor who confirms that a caveatable interest exists.
A caveat can be removed by the consent of the Caveator/Lender, or by the registered proprietor lodging a “lapsing notice” which removes the caveat unless the Caveator appeals to the Supreme Court. A caveat used to protect a loan is generally most frequently removed once the loan has been repaid.
Now back to the question: how does everyone adapt to this reality of bad credit as the current norm in this time of global pandemic?
Caveat Loans can be a workaround to the reality of bad credit. Because it is a secured business loan, it is a step up in acceptability due to its less risk compared to unsecured loans.
Securing bad credit caveat loans are possible depending on the lender’s assessment of the borrower and the offered collateral. A good piece of property offered to a caveat lender for short term business loan requirements makes it easier for the borrower to say yes to a borrower’s short term loans requirements because caveat loans are considered as secured business loans. In this case, the caveat agreement can positively influence the lender to overlook, or at least reasonably justify, the question mark on the important consideration of the character of a borrower with bad credit.
Because the pandemic still has no end in sight, we can expect to see lenders increasingly requiring caveats or similar assurances to mitigate the uncertainties of lending to borrowers operating businesses under the ongoing pandemic reality. Common sense would dictate that secured business loans are the way to go for lenders as they navigate the sea of bad debt in search of borrowers with acceptable risk.
For the borrower with ownership of a real estate, offering said property or properties to secure a loan will give them an advantage and move them a step up in the lender’s approval process.