How to Respond When a Lender Pulls The Plug
Your relationship with your bank has broken down and you have a cashflow crisis. So, what options are available to your small business?
There is nothing more frustrating as a busy small business owner than an unforeseen cash-flow problem causing your lender of choice to tighten the purse strings, or worse still, pull the plug.
In the current climate of uncertainty, lenders are understandably cautious about lending money to businesses that lack a positive trading history or those that have breached their bank facilities previously. While banks will not necessarily want to pull any existing finance arrangements in these situations, they will probably not want to extend them.
Your relationship with the lender
Often the reason for a bank’s reluctance to lend more finance comes down to the nature of its relationship with the lender. If you’ve failed to communicate in an open and honest way about your performance and taken a proactive approach to sharing management accounts, the bank is less likely to view you as a good credit risk. Banks may also be reluctant to rely on business forecasts, preferring instead to base their decisions on current management accounts and evidence of a strong trading history.
Sometimes there is tendency for entrepreneurs to stop communicating with their bank if things take a turn for the worse. While this is understandable, it can exacerbate problems. It is far better to deal with the matter in an upfront way by renegotiating repayment terms or compiling a compelling case for the lender to extend its current facility. It may be worthwhile to bring in some expertise to help with the negotiations.
If you’re concerned that your bank may be looking for a way to extract themselves from their facilities, there are some signs to look out for. A change of relationship manager, for example, could indicate that there might be problems ahead particularly if the relationship is being downgraded. If this happens just prior to the expiry of an existing facility, this could be a further sign that the bank may not want to renew. More often than not, banks will want to give businesses as much notice as possible that they are unlikely to extend their facility, but this shouldn’t be taken for granted.
It is dangerous for you to assume that your lender will be willing to help you out in a challenging situation. Banks will be comfortable with a specific level of lending, which is usually based on the security available, and if this changes, any prospect of a future loan could quickly disappear.
How to avoid any problems
To avoid the risk that a lender might pull the plug, you should air any problems at an early stage. In some instances, the bank might request that you invest some of your own money into the business in order to shore it up in the short term.
Depending on your attitude to risk and your belief in the business, this may be an option you would like to consider if it means keeping your current facilities. However, it is important to seek advice before taking this course of action as it may be necessary to seek assurances from the lender that they are willing to maintain the current facility at a certain level for an agreed time period.
Depending on the severity of the cash-flow crisis facing you, or the extent to which the lender/borrower relationship has been damaged, it may be necessary to seek alternative finance. For this reason, it could make sense not to have all your eggs in one basket and the recent proliferation of alternative finance options means that virtually any asset on the balance sheet can be leveraged to secure finance.
Alternative finance options
One of the most popular types of alternative finance for business owners experiencing cash-flow difficulties is invoice discounting. This allows you to borrow against unpaid client invoices, with an option to receive in the region of 70-90% of the value of the invoice the following day. You receive the remainder when the invoice is paid.
While the process of securing finance can take a little longer, crowdfunding platforms are also a popular choice for small businesses seeking alternative finance. These provide cash loans but it is important for business owners to check out the specific terms and compare the security requirements carefully.
The new kid on the block is single invoice discounting. This works in a similar way to invoice discounting but is based on the value of specifically chosen client invoices rather than taking into account the whole debtor ledger. This can be especially useful to seasonal businesses that expect cash-flow problems to arise at a specific point in the year, or if they have one big customer on an irregular payment cycle.
If you believe that your lender may be about to pull the plug, you should seek advice immediately to find out more about the alternative finance options available and to identify which best suits your needs and individual risk profile. By intervening early and putting your best foot forward with your existing lender, it may be possible to ride out your current cash-flow difficulties and strengthen the relationship with your lender too.
Paul Davies is a director and head of turnaround at accountancy firm, Menzies LLP.