The old adage ‘not putting all your eggs in one basket’ is accurate when it comes to business banking.
When you obtain any kind of traditional Bank finance for a company overdraft, bank loan, or invoice finance arrangement, the Bank will request a debenture and this is usually supported by a personal guarantee. The reason is these debts are available on an unsecured basis. So, the Bank, wanting to reduce its risk, will ask for the debenture if your risk exceeds the underwriting requirements. A debenture is a charge over company assets usually on a fixed and floating charge basis and is registered at Companies House.
This banking debenture changes the nature of the relationship with the lender, as the lender becomes a ‘secured lender’. By doing so, the Bank has the right (if it feels ‘at risk’) to put its own administrators or receivers in to protect its interests.
Remember a key reason used for having invoice finance is to improve cash flow, so banks will inevitably take away your overdraft. Not always, but this is very common business banking practice. To an extent, this approach is understandable as they are being asked to double their risk.
The real problems start as the bank gets a feel for your invoice finance and tightens its grip on the charges and control, which can have exactly the opposite effect on your cash flow as was intended. Complicate this with an increase in bad debt (if not insured) and they can cut off the cash. The department that provides the invoice finance will not be the same department that provides general banking. Lack of communication is not uncommon.
Now, as the bank may have loans too, and possibly an overdraft, they can also insist on business practice restrictions and insist on regular and frequent reporting. If they are at risk on invoice finance the overdraft and or loans can be called in without notice.
In essence, the bank is placed firmly in the driving seat and directors can often feel they have no control. To summarise, to avoid pressure from your Bank and having cash-flow squeezed out of your business, avoid banking with your invoice finance partner.
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