Many businesses rely on having access to flexible cashflow support, typically bank overdrafts or invoice discounting facilities. Such credit lines are however put in place for a specific term and reviewed periodically by the lenders, at which point they could just withdraw them.
Traditionally of course the bank (in the case of an overdraft) would see the facility was due for renewal and either just extend it without formality or ask for a meeting to update themselves on how things were going. The business owner might have a relatively passive, reactive approach to all this.
Businesses should now however get organised and take a lead in this process. Banks no longer find it easy to provide lending by overdraft. Renewing overdrafts is as time consuming and ‘compliance bound’ as setting up a new facility. It is also an expensive way for the bank to lend (as they have to provide capital reserves assuming full utilisation) and interest rates and fees don’t provide sufficient return, especially when compared to a loan. This is why overdrafts are being withdrawn on renewal and businesses are being ‘encouraged’ to either replace the overdraft with a loan or switch to borrowing by way of invoice discounting.
Similarly with the renewal of Invoice Discounting facilities the lenders often use that as an opportunity to review their terms, and understanding lenders packages and going into negotiations with them requires the business owner to be well prepared ahead of the review date.
So do you know when your overdraft or invoice discounting deal is due for renewal?
Best advice is to:
- Be in control – know when the renewal date is and start preparing for this say two months in advance.
- Look yourself at how the facilities have been used – in the same way that the lender will – and think about how the lender will react to that. If you have made light use of an overdraft the bank might argue that you don’t need it, similarly if you have used it permanently (lenders call this ‘hard-core’) they might argue it is really a loan.
- Pull together information that you want to present – such as year-end figures or management information.
- Think about the business’s funding needs over the next year. Be ready to justify those and present a compelling case for the lender to provide what you need (not what they would rather give you)
- Get some input from an adviser who understands how banks work – it could be important enough.