Q: My turnover has reduced by 75 per cent as a consequence of the recession. Now I have a poor credit rating and the bank will only provide an overdraft equivalent of only three weeks' turnover. We’ve been in business for three years. How can we negotiate terms?
Jun 01 2010
Answered by: Clive Lewis Ask a question
My turnover has reduced by 75 per cent as a consequence of the recession. Now I have a poor credit rating and the bank will only provide an overdraft equivalent of only three weeks' turnover. We’ve been in business for three years. How can we negotiate terms?
You can understand why the bank is being cautious. A turnover reduction by 75 per cent would raise serious doubts about the long-term future of your business. That you are still in business is a testament to your persistence and determination.
I suspect you are in a catch-22 situation. What will increase the banks perception of your business’ viability is an increase in turnover, but this may be difficult without working capital finance.
One possibility is to consider factoring or invoice discounting your sales invoices. This is not suitable for all businesses, If you sell to other businesses (not directly to the consumer) and your customers are credit worthy it might be a good choice. The factor or invoice discounter provides up to 80 per cent of the invoice value straight away and the balance (less costs) when the customer pays. With factoring the finance company takes over the credit control and the customer pays them directly. With invoice discounting you retain the credit control but the finance provider sets the credit limits applicable to each customer. Factoring or invoice discounting has the merit of giving an increased facility as your sales rise but reduces when sales fall.
You should also consider if you have any business assets, which might be sold or re-financed to provide working capital. You may have a motor vehicle or other assets which could be subject to a hire purchase agreement to provide more working capital.
You might want to consider approaching another bank. Many banks now have a confidential hotline that you can use to make an initial approach. The banks websites will have the details, as well as useful suggestions for improving your financial management. However your poor credit rating may deter other banks interest in financing your business.
You might have some personal assets, which can be sold to realise some cash to inject into the business. You should be convinced that the business has a long-term future (in business terms, is viable) before considering this.
I suspect there are few quick solutions. You may have to trade out of your difficulties, keeping the bank informed of any improvements in sales. You may have to wait until it is evident that sales are growing in a sustainable way before they will consider increasing your overdraft facility.
You will find the Business Link website offers useful, practical advice on business finance and cashflow management.
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