PG on Business Overdraft - New Normal?

[purely14]

Hello all

General question here - We have a 3 y/o company, healthy balance sheet with small profit each year, good credit score, turnover of £280k (projected £300k+ this financial year) and a £5000 overdraft facility available at our present business bank. We rarely dip into the overdraft but as the company is growing and we work in a somewhat seasonal industry I wanted to explore increasing the overdraft size to £10-15k just in case we need it.

It all seemed pretty straightforward but then our bank told us we would need to provide personal guarantees on the increased amount which we refused - so the application did not proceed.

Rightly or wrongly I was fairly incensed by this so I had a quick look at other banks - I checked Metro and Barclays and both of these banks now appear to ask for PG's for ALL business overdraft facilities, Metro states this on their website and Barclays told me over the phone.

My question is this: Are PG's now industry standard practise for all business overdrafts? I'd rather not have to do it but if basically every bank wants it now then we will need to change our stance if we wish to proceed with our overdraft extension.

Many thanks

 

[The Byre]

1, Yes, PGs are standard.

2. Debt is the enemy of the SME as it increases your risks exponentially.

3. If you look through the 'Help!' postings on this very forum, they almost to a man are either drowning in debt or it is yet another case of partners falling out over some personal rubbish.

4. Walking away from debt and leaving the creditors holding the baby seems to have become 'The People's Sport Number One' just lately. This irresponsible attitude to business is everywhere and a PG helps to stop that nonsense.

5. Why don't you want to sign a PG? You do intend to pay them back, don't you?

6. £300k TO - you should slowly build up a cash float of about 10% of TO, then you won't need an overdraft and your company is secure for all those times when the customers fail to turn up as expected - and about once every few years, they really do stay away in droves!

 

[Mr D]

Yes in my experience PGs are pretty common.

Father in law had a business overdraft for his company with Natwest 4 years back, he had a PG and overdraft facility was only at the time under £10k.
He never used it in full, never planned using it in full. And as he had no problems paying the overdraft off then the PG was never used.

I have to agree with The Byre somewhat on this one - a PG only comes into effect if the business does not pay. What is there to be incensed about? You want their money, they want at some point their money back. Win / win all around.

The other method is to save some of your small profit each year to build up in a savings account to make up the £10k to £15k you are thinking of.
Surely with £280k turnover increasing to £300k that should be fairly easy?

 

[Neil Lukins]

PGs for overdrafts are standard and have been for a long time.
You say you have a 5k overdraft already. I would hazard a guess that if you check the small print you have a PG on this also - increasing the overdraft will need an uplift in the guarantee.
If you are worried about offering a PG then you can take out PG insurance to protect yourself

 

[Mark T Jones]

Banks seem to flit in and out of offering overdrafts up to £10k without PGs. This will be set at top level, it’s unlikely in this day and age that a manager will have any discretion

With bad debt rising, and a very strong chance of recession I’d guess they will all have closed off. The no-overdraft facilities

In reality the nature and level of funding you are looking for seems to make sense If it’s what your plan is all about, then id throw in the PG.

 

[billybob99]

I used to have a £1K overdraft and bank wanted a PG to increase it to £2K.

Told them to do one in the end and sorted it from profits.

@The Byre has already covered what you need to do anyway.

 

[MBE2017]

No reason to be incensed, the banks HQ will often send an email stating new rules to its managers, whether you make money or not, have just joined or been with them for years matters little.

Apart from asking around there is not much you can do about it, you will find a bank sooner or later that will probably offer what you want, but you could suffer in other ways.

 

[MOIC]

There are 3 rules for small businesses (under 1 million turnover).

1. Don’t give credit to customers.

2. Don’t accept credit from suppliers.

3. Don’t rely on loans to help or expand your business. I would include an overdraft in this point.

 

[Chris Ashdown]

From experience and also other posts, it's very hard not to use the overdraft and let it build up to it's limit, basically as banks will tell you, overdrafts are a expensive loan of money designed for very short term use, unfortunately with late payments coming into a firm it tends to be used all the time and just becomes another long term depb on the company with no hope of being paid off soon and very expensive to maintain

 

[pentel]

There are 3 rules for small businesses (under 1 million turnover).

1. Don’t give credit to customers.

2. Don’t accept credit from suppliers.

3. Don’t rely on loans to help or expand your business. I would include an overdraft in this point.

I would disagree with this, but only if supported by an honest cash flow forecast and a cash buffer.

If no cash buffer and no honest cash flow forecast then these are simple rules that work ( but may also stunt growth)

 

[Paul Norman]

Small businesses go under with alarming ease.

I can think of no compelling reason why the banks should be expected to take the risk of that happening. So, in return for them lending my business some money, I would expect to take that risk myself, and personally.

It is normal. Currently, I have no overdrafts at all (yup - we did pay them all back), but when I did there were certainly PG's in place.

 

[MOIC]

I would disagree with this, but only if supported by an honest cash flow forecast and a cash buffer.

A bank or any sane person would not lend on the strength of an ‘honest cash flow forecast’

95% of the time they are totally unrealistic and based on dreams of what the borrower hopes will happen, not what will actually happen.

We live in volatile times and this has to be taken into consideration.

Banks and other professional lenders have seen it all and learnt from past mistakes.

If you was a lender, would you lend on the strength of an ‘honest’ cash flow forecast?

I doubt it.

 

[pentel]

A bank or any sane person would not lend on the strength of an ‘honest cash flow forecast’

I didn't suggest they would

1. Don’t give credit to customers.

Some customers will only deal on credit, carry out credit checks, keep on top of credit control, payment with order is great, but not all customers will do this.

Payment with order terms can look like the supplier is in trouble, a credit check will show if they are sitting on heaps of cash or running hand to mouth.

2. Don’t accept credit from suppliers.

Credit from suppliers can be very helpful, almost like a free overdraft. Make sure they are paid on time. This builds up a credit history so that when the big job lands and you need an increase in credit limit then the supplier will probably look favourably.

If you don't take credit from suppliers ask for an early payment discount.

3. Don’t rely on loans to help or expand your business. I would include an overdraft in this point

Good luck with financing those new premises.....

 

[Mr D]

There are 3 rules for small businesses (under 1 million turnover).

1. Don’t give credit to customers.

2. Don’t accept credit from suppliers.

3. Don’t rely on loans to help or expand your business. I would include an overdraft in this point.

Credit from suppliers can be useful.
If the cashflow can support the payments.

Say you have £2k surplus a month, after all bills paid. Getting a £1000 credit line for a supplier and using it should not be a problem for the business. Whether the extra goods sell or not, cashflow allows for the bill to be paid easily. And supplier may sell additional few grand extra goods to this business over the year.


Now times that by say 10 suppliers. Get a load of stock in for Christmas on say 30 day credit terms - but cashflow won't cover the payments and the new stock may not sell quick enough or money received quick enough to pay the supplier.
That's the situation that credit use causes problems.

A little, easily paid, is workable. A lot can be the debt to sink the business.

 

[MOIC]

I didn't suggest they would



Some customers will only deal on credit, carry out credit checks, keep on top of credit control, payment with order is great, but not all customers will do this.

Payment with order terms can look like the supplier is in trouble, a credit check will show if they are sitting on heaps of cash or running hand to mouth.



Credit from suppliers can be very helpful, almost like a free overdraft. Make sure they are paid on time. This builds up a credit history so that when the big job lands and you need an increase in credit limit then the supplier will probably look favourably.

If you don't take credit from suppliers ask for an early payment discount.



Good luck with financing those new premises.....

My answer to ALL the points above . . . . .

If you need credit to facilitate your business, DON'T be in business.

Sooner or later you'll end up in trouble.

Oh and by the way . . . . . . DON'T give credit either!

 

[pentel]

If you need credit to facilitate your business, DON'T be in business

Wow...….

 

[The Byre]

My answer to ALL the points above . . . . .
If you need credit to facilitate your business, DON'T be in business.
Sooner or later you'll end up in trouble.
Oh and by the way . . . . . . DON'T give credit either!

As much as those sentiments mirror my feelings, I would hesitate to be quite that dogmatic.

Let's just say that if you cannot survive without credit, you should not be in business. Small amounts of credit can come in handy for taking and sending deliveries, extending the business and otherwise just taking up the slack when a business is expanding.

Credit sounds nice and cosy - the real word is DEBT. And debt is the opposite of one of the two main goals in business - profit and equity. Debt is the polar-opposite of equity. Debt may aid profit, but it must be measured against equity. Assets worth £1m. Debt for £1m. Your company is worthless!

A healthy total debt to equity ratio is about 50% (IMO) but depends on the type of business.

 

[Chris Ashdown]

You are running a company not a bank, so why offer credit to your suppliers unless they are first class places like Government departments , schools, hospitals etc

Most customers want your product, but have themselves a cash flow problem so unlikely to pay on time, regardless of your terms and their bullshite

Nearly all large companies are happy to issue buying staff with credit cards so it's easy for the accounts to handle small costs quickly and easily, so just reject companies asking for credit terms but suggest they use the company credit card, most will continue with the purchase, and the others in most cases would not have paid you on time anyway as they have their own cash flow problems

After a year of accepting customers on credit terms you will be surprised in how much time is spent chasing them up for payment and your own cashflow going negative or significantly reduced

 

[k100danny]

Yes these are pretty standard, I went through a similar thing with my company, details are pretty similar in terms of turnover and age at the time and we wanted to expand, we had to place a large order which was already sold but i didn't want to use my personal money as i thought the business is in a good place, surely the bank will give me an overdraft based on our accounts etc, i was wrong, they wanted a personal guarantee, and the fee was actually quite expensive for the length of time we needed it so i ended up loaning my company the money insteadas there was an ongoing fee even if i didn't use it and it was for a minimum of 12 months. we were making a healthy profit at the time too.

As others have said what is your reason for not wanting to sign one and why are you annoyed? banks are businesses that need paying too.

 

[MOIC]

Wow...….

Let me put some context to my post . . . .

Some customers will only deal on credit

That's exactly my point. If these customers need credit (for whatever reason) they should not be in business.

Credit from suppliers can be very helpful, almost like a free overdraft. Make sure they are paid on time.

. . . .and if they are not, you lose that relationship with the supplier. Better not to accept it in the first place, as the chances of you paying it back may rest on other circumstances that your business has not taken into account, for example a cancelled order due to a late delivery or other problems. You cannot predict the future.

Good luck with financing those new premises.....

If you need a loan to finance new premises, then don't move into the new premises.


My original post . . . . . .There are 3 rules for small businesses (under 1 million turnover).

My point was relying on credit/loans to keep your business afloat.

If I was selling a widget for £1 and Merceds-Benz ordered 1 million pcs, I'll get help to finance that specific order.

I wouldn't advise businesses to get credit to fund an order of (say for example) £10k.

Yes, there are always the exceptional circumstances, as there are in any debate.

 

[nelioneil]

Payment with order terms can look like the supplier is in trouble

I can guarantee most clients do not think like that. And if some do, sucks to be them that a supplier is being efficient with their cash flow.

 

[pentel]

If you need a loan to finance new premises, then don't move into the new premises

We were paying £35,000 per year in rent, 10 years to run on lease. We purchased a property for £450,000 ( with a mortgage of £250,000) and pay off the mortgage over the same 10 years @ £35,000 p.a.

At the end of the 10 years we have either £200,000 and the hassle of renegotiating a lease or moving OR a paid for property worth £650,000

Worked well for us!

 

[Mr D]

We were paying £35,000 per year in rent, 10 years to run on lease. We purchased a property for £450,000 ( with a mortgage of £250,000) and pay off the mortgage over the same 10 years @ £35,000 p.a.

At the end of the 10 years we have either £200,000 and the hassle of renegotiating a lease or moving OR a paid for property worth £650,000

Worked well for us!

As has been said a few times over the years, building up equity is a good thing for a business.

 

[WaveJumper]

A bank wants a PG for your overdraft (plus some nice charges to go along with it) you give credit to a customer with no personal guarantee or any other real guarantee of repayment other than hope.

I have always worked on the basis of not bank rolling someone else’s business with ‘cheap’ money let them go and get credit or an overdraft, if they can’t they not really got a business in my books.

 

[Ian J]

I have always worked on the basis of not bank rolling someone else’s business with ‘cheap’ money let them go and get credit or an overdraft, if they can’t they not really got a business in my books.

So Sainsbury, Tesco et al don't really have a business?

 

[Mr D]

A bank wants a PG for your overdraft (plus some nice charges to go along with it) you give credit to a customer with no personal guarantee or any other real guarantee of repayment other than hope.

I have always worked on the basis of not bank rolling someone else’s business with ‘cheap’ money let them go and get credit or an overdraft, if they can’t they not really got a business in my books.

The big companies appear to help their own cashflow by wanting to set terms. Major shops, amazon etc. Borrowing off the smaller companies.

 

[WaveJumper]

So Sainsbury, Tesco et al don't really have a business?

They slightly on the larger size (thought we were discussing much smaller business with overdrafts of 10k etc) however they probably screwing all their suppliers like most multi nationals. If people want to bank roll their clients fine but then you cannot complain about charges or PG's for over drafts you going to have to factor it it to your own costs.

 

[WaveJumper]

Thought it was just me ........... been a massive outage at CloudFlare taken down a lot of very well known sites including a lot of ******'s

 

[Ian J]

The big companies appear to help their own cashflow by wanting to set terms.

Once upon a time there was a corporate genius called Lord Weinstock who joined his father in law's company Radio & Allied Industries ltd and merged it into General Electric Company (GEC) which he built up.

He was quite up front with his suppliers telling them that if they wished to deal with GEC it would be on 90 day terms and he managed to build up huge cash reserves which he used as a warchest to buy other companies including Marconi, Siemens, Ferranti and quite a few other well know names until the GEC group became the largest corporation in the UK employing 25,000 people.

All done due to extended payments to suppliers.

It all collapsed after his retirement but that's another story

 

[Mark T Jones]

I'd generally say that anyone saying never borrow or give/take credit is talking rubbish.

However, I would also say that you need to be very careful on why and how you do it.

From their post, it would appear that the OP is being both sensible and cautious.

 

[Mr D]

Once upon a time there was a corporate genius called Lord Weinstock who joined his father in law's company Radio & Allied Industries ltd and merged it into General Electric Company (GEC) which he built up.

He was quite up front with his suppliers telling them that if they wished to deal with GEC it would be on 90 day terms and he managed to build up huge cash reserves which he used as a warchest to buy other companies including Marconi, Siemens, Ferranti and quite a few other well know names until the GEC group became the largest corporation in the UK employing 25,000 people.

All done due to extended payments to suppliers.

It all collapsed after his retirement but that's another story

Warchest - read that as borrowing.

Some companies appear to operate in credit all the time, never borrowing more than they can afford.
Others appear to utilise borrowing to go from month to month for years.
And some never borrowing at all. Perhaps they are slow but smart. Perhaps they do not have the stresses on the business those borrowing from Peter to pay Roger.

 

[WaveJumper]

I'd generally say that anyone saying never borrow or give/take credit is talking rubbish.

However, I would also say that you need to be very careful on why and how you do it.

From their post, it would appear that the OP is being both sensible and cautious.

I would agree there is always a time that anyone (company) would or may need to borrow or offer credit, as said it wise to ensure your business either way has enough cash flow to service these requirements especially if you are just starting out or depending on sales to service your own debt.

Easy to ‘grab’ the business from prospective customers either offering credit or putting yourself in a position of waiting 30 / 60 plus days for payment, then suddenly realising you have a big gap in your own cash flow. I think we have seen many a business (particularly in the retail sector) large and small who have got themselves into problems when sales have dried or slowed down for one reason or another.

The OP is sound in his thinking but many posters I suggest have little handle on their day to day accounts / cash flow and get themselves tied up in all sorts of knots

 

[The Byre]

And some never borrowing at all.

(Either the verb is missing or the 'ing' is superfluous!)

But I have NEVER come across a company that never borrows. Even the giant German equity-plays like Aldi, Lidl, Bosch and Miele borrow some money.

My company has a zero-debt policy, but we still have to borrow to ameliorate taxes and simply to pay for stuff with a credit card, so that we have nice, tidy, monthly lists of expenses that can be matched to invoices. The cards get paid off, but that is still borrowing.

 

[Ian J]

Easy to ‘grab’ the business from prospective customers either offering credit or putting yourself in a position of waiting 30 / 60 plus days for payment, then suddenly realising you have a big gap in your own cash flow.

That's where I come in

 

[Mr D]

(Either the verb is missing or the 'ing' is superfluous!)

But I have NEVER come across a company that never borrows. Even the giant German equity-plays like Aldi, Lidl, Bosch and Miele borrow some money.

My company has a zero-debt policy, but we still have to borrow to ameliorate taxes and simply to pay for stuff with a credit card, so that we have nice, tidy, monthly lists of expenses that can be matched to invoices. The cards get paid off, but that is still borrowing.

Hey I got a C in my English coursework at GCSE.
My English is fine.

I've come across several that never borrow. One is a place I shop at regularly, a quaker family owns it. Nice people, absolute on not getting into debt.
The business does around £400k a year from a shop premises.

 

[Tirion]

I think credit scores are established over time. Although there are methods to improve a credit score fast, re-establishing a good score takes consistent behavior and time. Factors that influence a credit score include: credit payment history, length of credit history, new credit accounts, new credit inquiries, credit accounts in use.