A large part of my business development activity involves reviewing information on Companies House and cold calling businesses who I think would benefit from a review of their borrowing arrangements.
Common objections I hear from business owners on these calls are, “we’re ok where we are thanks” or “I had someone look at this a few years ago and we’re on the best possible terms” or “it’s too much hassle, we’ve got other priorities.”
In this article, I’ll address these objections and set out why it might be worthwhile reviewing your business borrowing. I’ll focus specifically on cashflow lending - invoice finance, revolving credit facilities and unsecured business loans; however, some of the points could equally apply to property borrowing too.
“We’re ok where we are thanks”
Your existing lender might not be giving you their best terms
Often, if you don’t proactively ask for lower rates or improved terms from your existing lender, you won’t get them. At the very least, you should speak to your existing lender annually to see if improved terms are available to your business.
However, for several reasons, set out below, your existing lender may not offer the best or most appropriate deal in the marketplace.
There are new products or reduced rates available
The lender with the lowest rates or best products at the time you agreed your borrowing facilities, might not be the lender with the lowest rates or best products now. There may even be completely new products that didn’t exist the last time you reviewed.
Two products that didn’t exist a few years ago now offer a hybrid overdraft/invoice finance facility that comes with no service charge. These products integrate with your accounting package and, for businesses that offer trade credit, can be a cheaper and more flexible alternative to either an overdraft or invoice finance.
| Invoice finance | Hybrid overdraft/invoice finance | Overdraft |
Standing charges | Service charge and other fees | None* | Annual renewal fee |
Security | Varies. Typically debtor book and partial or full personal guarantee | Debtor book and partial personal guarantee | Usually full personal guarantee and sometimes physical security |
Available funding | Grows with your sales | Grows with your sales | At lender discretion and sometimes limited by available security |
*Up to £300k. On facilities of more than £300k, an annual facility fee of 1.5% of the limit is charged.
“I had someone look at this a few years ago and we’re on the best possible terms”
Your trading performance has improved
You might have needed to use higher cost borrowing when you were an inexperienced start up or when trading was going through a rough patch.
However, now you’re an established business, trading well, then it could be time to switch to a lender that could offer more flexible terms at improved rates.
There’s been a change to your business model or terms of trade
If your business has changed significantly since the lending facilities were agreed, then they may be inappropriate now.
Perhaps your business has downsized but you’re still paying a high minimum service charge on your invoice finance, or you’ve started trading overseas but your current lender can’t fund your export trade.
Lender appetite has changed
If your lender changes their criteria and decides they no longer have appetite to finance your business due to your size or sector, then through no fault of your own, you may have to seek an alternative lender.
On the flipside of this, a lender may relax their credit appetite – meaning a decline from a lender you approached last year, doesn’t always mean they’d decline if you approached them now.
You’ve reduced your leverage
You’ve paid down borrowing so may present a lower risk to lenders.
You may no longer need such a large borrowing facility, so could switch to a smaller facility with a lower prepayment and lower fees. It might be more appealing to move away from invoice finance altogether and refinance using a loan or a smaller revolving credit facility.
A change in the interest rate environment
When borrowing was cheap, it might have been a good strategy to leverage up and invest for growth. With the cost of borrowing on the rise, you might decide to pay down some of your business debt and not use your borrowing facilities as much.
It could be more appropriate to just have something there for a rainy day, with low standing charges, rather than a facility you continually utilise to the maximum.
“it’s too much hassle, we’ve got other priorities”
It can be a good negotiation tool with your existing lender
As your single point of contact, I take the hassle out of approaching lenders, having early discussions with them and sourcing terms. I don’t charge a fee for sourcing a cashflow facility and only receive commission from a lender if you subsequently take out borrowing with them.
It can be a little frustrating when a client uses the lending terms I’ve sourced for them to go away and use it as negotiating leverage with their existing lender, but that’s par for the course of being a commercial finance broker.
The reality is, having indicative terms on hand to present to your existing lender can be a great bargaining tool.
To save money
Following a review, you might be presented with lower cost terms, but just don’t see the saving as worthwhile enough for the perceived hassle involved in switching.
The theory of marginal gains dictates that small, incremental improvements, when added together, make a significant improvement. If you pay the same attention to costs throughout all aspects of your business, it can transform your profitability.
Not only that, any saving you make on your business borrowing recurs year on year, going straight to your bottom line.
To reduce or remove a personal guarantee
If you’ve still got high interest-bearing debt that you’ve personally guaranteed and you’ve not tried to refinance onto one of the government-backed lending schemes, then you must have been hiding under a rock for the past two years.
Some business owners like to think their business is invincible and are happy to give a full personal guarantee. That decision is brought into sharp focus when something unexpected goes wrong and you find yourself on the hook for the full amount of borrowing.
The Recovery Loan Scheme ends on 30 June 2022, but some lenders have started closing access to the scheme already, so you'd need to get an application in asap now.
A couple of the main attractions of the Recovery Loan Scheme are no personal guarantees for facilities of £250,000 or less and the annual effective rate of interest, upfront fee and other fees cannot be more than 14.99%.
Please get in touch on 07485 724 024 or email me at ed.wileman@editfinance.co.uk if you’d like to discuss anything related to business lending.
