Don’t Be Undone By Bad Credit

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:

1. Choose the right lender. Banks are always happy to give money as long as they can get it back, but in some cases it is better not to have at all than to get a bad deal. The interest rate is just one factor you should look at. Some banks have a good record for supporting the businesses they give credit too. They are not looking for the first opportunity to repossess your assets. It might mean choosing the bank with a higher interest rate, but if that bank is willing to let a repayment or two slide without charging you a premium, then that might be what you need. You also want a financial institution that is sure to be there in the years to come, and won’t fold up with your money.

1. Read the contract thoroughly. Before you sign on the dotted line, make sure you absolutely know everything there is to know about that contract. What exactly is the bank expecting from you? Under what conditions will things change? Are they demanding too much collateral? Do you understand the small print? If you don’t have a lawyer, get one. A lawyer might seem expensive at the time, but not as expensive as what the bank will charge if you run into trouble. Get expert counsel before you commit because once you do there’s no turning back.

1. Don’t borrow for recurrent spending. This is the golden rule of borrowing. When you take credit, make sure it goes into investments. Spend the money on things that generate income for your business, otherwise you would have to keep borrowing to take care of the same unproductive elements over and over again.
2. If you can do without it, do. If you don’t need the extra credit don’t take it. It is always better to under-borrow than to over-borrow. If you take less you can always go back for more. But don’t borrow too little and have to keep going back constantly or the bank may lose confidence in your planning and preparation. If you take too much you might be tempted to be too generous with your spending. Your company car doesn’t need to be a Lexus.

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.

About the Author

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 01451 832533 and you can also follow him on Google+

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