Discovering a cash flow problem within your business can create a daunting time of uncertainty and worry. Not only are you concerned with ensuring you meet your business demands, but you know that the bank, with money tied up in your business, is wanting to know how you’re dealing with it.
Here is a guide to the ways that your bank may react. Use this to help you understand the potential changes to your lending agreement, anticipate these and consider how it could affect your business in the future.
How will the bank react?
So far, they have supported you – backing your business plan, lending you money while ensuring that they monitor your progress. But now, they will see you as a greater risk to them and may make some changes to protect themselves.
Your bank may have a variety of reactions to your funding problems, all changes made to your agreement with them to protect their lending. They may implement one or a combination of the following changes.
- The offer of further support.
Great news! Be aware though, this support will come at a price: additional fees or an increase to your current interest margin.
- An increase in price for their borrowing facilities.
They could choose to do this in reaction to the increased risk to them. It may come in the form of a rise in interest margins or arrangement and monitoring fees.
- Heightened security requirements.
The bank’s priority is to protect themselves so they may request a higher level of security – collateral against their money. They could request personal guarantees from the directors of your business, which may need to be supported by personal assets, rather than company assets.
- The inclusion of additional financial terms and conditions.
The bank could wish to monitor your business more closely to assess your recovery from your funding issue. They can request information of accounts every month, rather than quarterly, for example, or ask for weekly cash flow forecasts.
- The addition and/or tightening of bank loan covenants – such as increased debtor cover.
- Pressure on you to enter into costly bank products.
Your bank may try to persuade you to consider some of their products to assist your business through your financial difficulty.
This could be interest rate hedging (to provide protection from or minimise the impact of increasing interest rates); fixed interest rates or a switch from Overdraft to Invoice Financing – whereby its service fee would be based on your sales turnover.
- There is a risk that you be moved into “intensive care” by the bank.
This could result in monitoring fees being levied.
- An independent assessment of the business.
A bank could appoint independent accountants to assess your business on their behalf and report their findings back to them. The cost of this would be expected to be covered by you.
How will these changes affect my business?
The overall impact of any of these changes would be a higher financial cost, management time being used differently and a period of worry and confusion. Thankfully, some people have experienced and overcome similar issues and are willing to advise, mentor or guide you through your funding problems.
At Ampios, we have years of experience over a range of business sectors and have the expertise that you need. If you’re looking for help, support or advice, don’t hesitate to get in touch.
Alan Wilson – Specialist in Banking Relationships & Borrowing Arrangements