Chartered Accountants & Business Growth Specialists

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Out of the Frying Pan and into the Fire?


Out of the Frying Pan and into the Fire?

If you're struggling to find a High Street lender it's often tempting to look to "challenger" banks. However, further borrowing is often not the answer.

I saw an excellent article recently by Griffin & King regarding the risks of borrowing from some of the “challenger” banks, when your business is struggling.  It pointed out quite rightly that when the high street banks won’t lend money to struggling businesses, it is because the risk of default is too high.

I don’t wish to paint all alternative lenders with the same brush, but there are certainly some that will lend to cover HMRC arrears, overdue suppliers etc. without sufficient due diligence.  Additional funding is rarely the answer, unless the underlying reasons for the business failing have been identified and addressed.

Before going down this route, it is important to speak with your accountant and understand the possible consequences.  The example that Griffin & King used was of a company that had borrowed £140,000 to pay HMRC arrears and overdue suppliers.  The directors had given personal guarantees of £130,000.  Just six months later, creditors including HMRC were running at £300,000 and the business had lost a similar amount in the previous twelve months.  There was no alternative but liquidation.

So, far from being the solution to the problem, the loan worsened the situation with the directors having personal liability of £130,000 and the likelihood of having to sell their homes to meet their obligation!   

Alternative lenders/challenger banks do have their place and if you need cash quickly for a legitimate purpose (not funding losses), then they offer a good solution.

Always take time to reflect and seek an objective independent view.

Martyn Wright

Senior Advisor, Business Growth