Options When a Bank Calls in Your Business Overdraft

January 28, 2016

There are several reasons why a bank may call in an overdraft. During the credit crunch a few years ago this happened on a regular basis and caused many companies financial difficulty. Banks would use reasons such as ‘your business no longer fits our risk profile’ or a letter sent by the bank may state that the ‘bank’s policy for providing overdraft facilities is changing’. For a business owner this can be a very worrying situation and can pose a threat to the whole business operation.

So what are the options if this happens to you?

  1. Talk to YOUR BankThe first thing you should do is talk to the bank and find out the key reasons why the overdraft facility has been removed. Have a think about your recent transactions through your business bank account and look for any reasons that they may have for removing your overdraft facility. Make sure you communicate in writing – email is fine – so that you have a full paper trail. You may be able to negotiate a deal where you reduce your overdraft by half and the bank provides you with a loan for the remainder, for example:-

    If you have a £200,000 overdraft and the bank want to remove this facility, ask if your bank will provide you with a £100,000 loan and then keep a £100,000 overdraft in place. This spreads the risk for the bank and still gives you access to the full amount of £200,000. However, this only works if your business will support this model – do your sums or ask your accountant to do them!

  1. Talk to a NEW BankBanks operate in a competitive market so they want to win new business. If your bank won’t support your business then talk to an alternative bank. Don’t just assume that if your bank won’t help then all the others will be the same. Most banks provide business facilities and would be happy to discuss your business plan and financing needs – if you don’t ask you don’t get!

Factoring and Invoice Discounting

Historically, this was seen as a last resort or a signal that a company was having financial difficulty, but in more recent years having this type of facility has become commonplace. It can be a great way of raising funds from your current debtors for a commission to the factoring company. Depending on your circumstances you may be able to draw down between 70%-80% of your customer invoices so, for example if you were owed £100,000 by customers you could have between £70,000 and £80,000 in your account straight away which may reduce the need for an overdraft.

  1. CrowdfundingThis is a relatively recent phenomena which involves several small investors pledging money for a business or project. By spreading the risk between several small investors businesses can soon raise money in return for a potential equity stake in the company or a good return on investment. Several websites offer this service such as Crowdfunder or Kickstarter. You have to put together a good ‘sales pitch’ on the web site in order to attract investors, stating a target amount you would like to raise. If you don’t reach the target then then you don’t receive the funding. This could be a high risk strategy if you need to raise the funds quickly.
  2. Friends and FamilyIt may be tricky subject asking friends and family for money, but if you put together a proper proposal that everyone is happy with this could be a good way of raising money quickly. It’s very common that people say after the event ‘Oh you should have come to me, I’d have lent you the money.’ Most people will want to help and as long as you treat it as a business transaction then the social relationship should not suffer. It’s important to put together the correct paperwork and make sure the terms of the loan are agreed.

Company Rescue Service

For most companies an overdraft is a vital cornerstone of the business and without it trading may become difficult. It’s important to seek advice on how a company can carry on trading without having the necessary cash flow in place. For any director or company owner, running a business in a fragile state could mean they are trading insolvent. This is a dangerous position and could expose that individual to hefty penalties and implications. For information and confidential advice, be sure to seek the services of a professional business rescue and recovery specialist.

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