When your business finally secured that much-needed bank loan you must’ve been over the moon. There was going to be steady growth, increased productivity, more revenue, better looking facility, more staff etc. But then the economy hit a bust and before you know it, everything has been turned upside down. You missed one repayment, and another and then another. You needed a new loan to pay off the old one, or risk losing your business. But this rate is even higher and soon you find yourself wondering how you are going to get out of this mess.
Credit is a necessary part of business (unless you invest your own money into it). You will always need support from a bank or building society or some other financial institution. Whilst no one imagines not being able to repay the loans, very few people are aware of the true cost of credit. The unfortunate thing about debt is that it is a double loss because despite owing money, you can’t make more money to repay it. In other words you owe (one loss), yet you can’t create (another loss). If you injected the £5,000 you owe into your business it would bring in much more, so that’s at least £10,000 gone.
To prevent yourself from getting into such a sticky situation, you need to put in place a lot of preventive measures and contingency plans. Unfortunately you can’t rely on luck to run a business. Can you guarantee steady demand for your product? What is your worst case scenario? At what point will you be willing to throw in the towel? If your business is to survive for years to come, your credit will have to be managed strictly.
To avoid a credit crisis:
If you have already taken out the credit and you are defaulting on your loans, there are ways to handle it. The most important thing is to be completely honest with your lender. After you’ve recalculated your cash flow expectations, talk to your bank. Tell them exactly what the situation is, how you plan on fixing it and when. As you know, a lot of people have defaulted on their loans, so the banks aren’t looking to lose any more customers. Ignoring the banks calls and letters only makes matters worse. The bank wouldn’t know what is going on or when you plan to repay, and so they will have no choice but to take aggressive action. Whatever you do, don’t let it escalate into a court case, because even if you win, your company’s credibility will be hurt.
Mark Jefferson is a seasoned commercial finance professional with over 25 years’ experience in financial services, much of that spent providing funding to SMEs. Mark has worked with many other firms in a similar situation to yours. Call Mark on 0800 157 7355 and you can also follow him on Google+
Every month Business Recovery help businesses improve their cash flow. Request a quote to find out how much extra cash you could raise.