Updated: 15th January 2020
Published: 14th January 2019
It can be difficult to start a new business and take it to new heights when financial liabilities are eating into the profit and you are receiving pressure from the bank to make repayments on a business bank loan. Before you know it, the bank is sending a series of reminder letters with mounting interest and higher repayments each month.
Restructuring measures and taking steps to raise alternative finance can help rescue your business from debt build up and falling into arrears with the bank. If you cannot pay your business bank loan, taking restructuring advice from a licensed insolvency practitioner can help reduce spending by downsizing operations, reassigning duties to maximise staff efforts, and introducing technology to improve the efficiency of the business.
If you can’t make business loan repayments, your business may have to endure the following consequences which can damage the reputation of the company from the point of view of creditors.
If you cannot repay your business bank loan, the next course of action the bank will take is to enforce late payment fees, interest and in some cases, administration costs for each payment that you miss. Depending on the provider, if you miss between three to six payments, you will default on the business loan.
If you can’t keep up with commercial loan repayments, the agreement between the business owner and the bank will be terminated, no longer binding both parties. A loan default damages the credit record of the business as it will be visible to all lenders, making it harder to secure borrowing in the future.
A credit record is a reflection of responsible borrowing behaviour, risk factors and previous credit held with lenders and banks. A poor credit record can affect future eligibility for finance and make the creditor reluctant as they will have a smaller risk appetite as a result of your borrowing history.
If you have taken out a secured business loan, including any form of asset-based lending, your borrowing will be secured against a specified property or other asset. This works as a safety net for the bank, so if the business owner was to default on payments, the outstanding amount would be recovered as a result of seizing the assets. Assets such as commercial property, vehicles, machinery and equipment can be repossessed if you can’t pay your commercial loan.
If you are a company director taking out an unsecured loan with no track record of borrowing, the bank may request a personal guarantee agreement. By agreeing to a personal guarantee, the director agrees to pay the loan back should the company not be in a position to do so. This agreement still stands even if the company was to be formally liquidated at any point in the future.
The bank may issue a County Court Judgment, also known as a CCJ, which can affect the credit rating of the business. This is a formal declaration that the business owes money to the creditor and that repayment has been ordered. This will remain on the business credit record for six years, minimising your chances of qualifying for future finance.
In order to rescue the business from outstanding debt, you can seek alternative finance such as invoice factoring and invoice discounting to receive a cash advance on unpaid invoices. By receiving early payment on goods delivered, you will be able to repay the bank and inject the business with emergency funds, taking it out of debt and back on the road to producing a profit.
There are two types of invoice finance options; invoice factoring and invoice discounting.
Invoice finance can be used to speed up cash flow after a service has been provided or goods delivered. Once an invoice has been issued, the cash tied up in the outstanding invoice will be released by a lender. If you have completed a large sale and you are awaiting payment from the customer, invoice finance allows you to access funds quicker.
The differences between both invoice finance options are as follows:
Invoice Factoring – Once the service has been provided and the invoice has been raised, the lender will transfer majority of the balance to your company. Once the customer makes payment, this will be received by the lender, who will then transfer an agreed amount to your company, excluding fees and charges. The lender will have majority control over the collection of the debt from the customer.
Invoice Discounting – Once the service has been provided and the invoice has been issued, the lender will pay majority of the balance to your company. Once you receive payment from the customer, you will retain an agreed amount and the remaining balance will be sent to the lender, including agreed fees and charges. You will have full control over the sales ledger and the collection of the debt.
The funds can help meet repayment for your commercial bank loan, saving you in late payment fees, interest and a termination of contract from the banking facility. By accessing the funds quicker and bridging the gap between the sale and payment received, you will be able fulfil your payment duty to the bank. We deal with over 50 finance lenders, so we can put you in touch with an invoice finance provider, helping to quickly improve cash flow.
Refinancing a business bank loan may work out to be a cost efficient option and a quick way to pay off your commercial loan if you are struggling to raise funds. If you are able to source a cheaper option than your current loan, refinancing can help minimise current debt, replacing it with a slightly cheaper debt.
By refinancing, you may be able to find a better deal with reduced interest, longer payment terms and free up money to pay off your debt. If a cost effective option is unavailable, which may be the case due to bad credit, one of the alternative options may be better suited to your business.
If the business is on the road to insolvency, you may be able to enforce a company voluntary agreement (CVA). A CVA allows you to formally negotiate lower terms with creditors if you believe that your business can be profitable again. It can protect against any legal action that can be taken against you by creditors, halting the pressure and allowing for some breathing space.
At Real Business Rescue, we have a team of licensed insolvency practitioners nationwide who can look into the best option for your company if you are struggling to pay a business bank loan. If you would like to explore invoice finance options or discuss restructuring, call our experts today on 0800 644 6080, to arrange a free no-obligation consultation.