In other words, the risk of running out of cash in your business.
This can be caused by a range of factors:
Poor financial forecasting
- Ignoring mid-month overdraft peaks leading to insufficient headroom in borrowing facilities
- Debt service commitment (the cash needed for interest payments & capital repayments) uses up too much of your cash flow
- Too much reliance on short term debt meaning annual renewal and exposure to changes in terms & conditions or refusal to renew
Poor cash control
- Purchasing capital assets from cash flow and leaving the business short of day to day working capital
- Inadequate debtor control (e.g. collecting debts too slowly)
In-built business vulnerability
- Allowing too long a period of credit – this may attract financially weak customers with the accompanying risk of bad debts
- One predominant creditor – financial impact of changes in terms of trade (e.g. reduced credit period)
- One predominant debtor – financial impact of delay in settling payment or taking business elsewhere
- Seasonal trading or fluctuations in taste or fashion
- Competitors are much larger – under-cutting on price and better able to ride out a squeeze on profit margins
Any financing issue will raise concerns with a business’s funders and, especially, its bank.
Banks’ Reaction to a Financing Issue
If your bank offers additional support – great news!
However, that additional support may come at a price – additional fees and, possibly, an interest margin increase due to greater perceived risk.
What happens if your bank doesn’t want to provide additional support?
Because of the greater perceived risk mentioned above, a business could still be faced with higher financing costs even if the bank isn’t supportive – a further strain on an already tight cash position.
Also, the business’s owners would still have the problem of finding another solution to the original financing problem.
Some Bank Reactions when Businesses have Financing Issues
- Higher pricing for borrowing facilities due to an increase in risk – interest margins, arrangement & monitoring fees
- Increased security requirements – request for personal guarantees from directors, possibly supported by personal assets
- Additional financial conditions – management accounts monthly instead of quarterly, weekly cash flow forecasts
- Additional and/or tightening of financial covenants – increased debtor cover
- Pressure to enter into costlier bank products – interest rate hedging or switch from overdraft to invoice financing
- Risk of being moved to “intensive care” – with resultant monitoring fees levied by the bank
- Insistence on an independent business review – appointment of investigative accountants with the cost being picked up by the business
Overall Impact on your Business of Bank Reactions
- Higher costs at a time when cash flow is already tight – after all this was caused by a financing issue
- Valuable management time used up – responding to the bank rather than guiding the business through its current difficulties.
How Ampios Can Help
Here at Ampios, we have a team of dedicated specialists who can work with you and your bank. We can also introduce you to alternative finance providers. All that to ensure your business has the right forms of finance for its needs now and in the future. If you need to get in touch, we’d love to have a chat. Give us a call on T: +44 (0)333 987 4672 or send us a message via our contact form.