Updated: 8th January 2020
Published: 24th June 2015
Many companies rely on third-party finance not only to assist with large scale purchases, but also to facilitate the smooth day-to-day running of their business. Accessible channels of flexible finance allow for business to continue uninterrupted even when late paying customers and unexpected costs put a temporary strain on cash flow.
Business credit comes in various guises serving different purposes depending on the nature of the company in question. Credit agreements with suppliers mean stock can be purchased; while asset finance allows a company to improve its operations through the acquisition of better machinery and other business assets. Being refused credit could not only prevent the proposed purchase of new equipment, but in some cases could see operations grind to a halt should the company’s cash flow dry up.
If your company has been refused credit, your first step is to find out exactly why you’ve been turned down for further borrowing. A decision to grant credit or extend credit is usually based on your company’s credit rating, especially if it’s with a new supplier. Potential creditors will typically run a credit check on your company before they are willing to extend a line of credit. If there’s something in that report which suggests your company may be at risk of not paying then it is likely that they will refuse you any credit and will instead ask for goods and services to be paid up front.
If you’ve missed or been late with previous payments to other creditors, if you have a high level of company debt or your company has any CCJs issued against it, then these can all affect your credit rating. It’s easy to get up-to-date information on your credit rating and it’s worth checking to see if it’s accurate.
You may already know why you’ve been refused credit, especially if you’ve been refused more credit from an existing supplier. This may be because you’ve defaulted on some payments to them in the past and they consider you high risk. If it’s an existing supplier, firstly make sure all previous balances are settled. Could you reduce the amount of credit you’re asking for? They may agree to a smaller credit limit, but you must stick to any payment due dates in order to rebuild their trust in you and your company.
When seeking finance for your business, don’t forget to look beyond traditional forms of lending. High street banks and building societies typically employ stringent lending criteria on potential borrowers with little judgement done on a case-by-case basis. However, there are now an array of alternative finance providers out there who are much more willing to consider your individual situation; crowdfunding, peer-to-peer (P2P) lending, and angel investing are all becoming more and more popular as small businesses are increasingly refused mainstream funding.
When you are faced with the prospect of not being able to access further borrowing, you should look at the reasons behind your need for credit. If your business is generating a healthy level of sales, yet you are having troubling managing your cash flow due to customers failing to pay on time, you may wish to consider alternative funding channels such as invoice discounting or factoring.
As this form of finance is contingent on the invoices your company issues, lenders are more willing to lend to you even if you have a less-than-perfect credit history. In fact it is the credit worthiness of your customers which is more important to an invoice finance provider as it will be them who is ultimately responsible for repaying the money.
Invoice discounting and factoring can be extremely useful financing tools for businesses, particularly those operating in industries where lengthy payment terms are commonplace. This type of financing releases funds to your company based on the invoices you’ve issued after you have delivered the goods or services to your customer. Typically you’ll receive between 85-90% of the value of an invoice within 24 hours of you issuing it; any remaining amount after paying the financing company’s fees will be paid to you after the invoice has been settled.
Invoice discounting and factoring are very similar as they both release funds based on the value of an invoice. The main difference lies in the fact that with factoring, the factoring company takes control of the sales ledger, meaning they chase the customer for payments and deal directly with your customers; whereas with invoice discounting your company keeps control of the sales ledger and remains responsible for payment chasing and invoice processing, so your customers don’t need to know that you’re using such a facility.
If your reasons for seeking additional finance were down to more serious concerns over your company’s financial situation, you are advised to seek professional help and advice as soon as possible. Existing finance facilities being restricted, or new lenders refusing to do business with you, are often early warning signs of company distress and they should not be ignored. If a lending institution has concerns over your ability to handle further credit, it is vital that you address these concerns in a considered manner. This is often best done by someone external from your company who can appraise your business independently and rationally rather than being clouded by emotion.
A licensed insolvency practitioner will be able to expertly assess your company’s current situation and help you understand your options going forward. This may include entering into informal negotiations with creditors, formally restructuring your liabilities, or obtaining finance through more niche providers. Rest assured that regardless of your situation there is a solution out there to resolve the problems you are facing.
If your company’s financial problems are getting too big for you to manage, then you need to seek professional advice. Speak to an insolvency practitioner to see what options may be available to you. We have an extensive network of 78 offices offering confidential director support across the UK. offering confidential director support across the UK.