How to negotiate better rates for Overdraft ReplacementPublished on 24th December 2018
If your business is in need of quick cash, your first instinct might be to approach your high street bank in order to establish an Overdraft Facility that will work alongside your current banking arrangements. However, the rules and regulations that banks must adhere to have made this form of finance difficult for SMEs to acquire. But, there is another way. Thanks to the Alternative Finance industry you could apply for an Overdraft Replacement facility, also referred to as a Revolving Credit Facility. An Overdraft Facility allows you to arrange a Line of Credit (LOC) from which you can withdraw funds from an agreed allowance without the need to involve your bank. Yet, although this allows you to access funds for your business whenever they are needed, such agreements tend to carry high interest rates. So if you’re wanting to establish a Line of Credit but are worried about what this may cost your business, here are just some of the steps you can take to negotiate a favourable interest rate when applying for an Overdraft Replacement.
- Ask to see a draft contract
- Consider asking for a smaller allowance
- Decide whether to provide security
- Improve your credit standing
- Check whether there are any additional costs involved
Can I ask to review a draft contract?
When first enquiring with a lender about applying for an Overdraft Replacement you can ask to review a draft contract, providing that one is available. Doing so will give you an early opportunity to review what terms and conditions you might be confronted with. In particular, check what covenants you may be subjected to and how they may affect your business. These can range from Informational Covenants, Affirmative Covenants and Negative Covenants to Financial Covenants, and may affect what you can and cannot do during the course of the agreement.
Therefore, to strengthen your position, make a note of any aspect that may cause you concern and compare contracts from other lenders. Although entering negotiations can be daunting, knowing what to expect early on could give you an advantage, helping you push for a lower interest rate and more favourable terms and conditions.
Should I agree on a smaller allowance?
Although you are under no obligation to withdraw any of the funds that could be made available to your business, one way to gain a lower interest rate is to ask for a smaller allowance. Of course, having access to a large allowance can be reassuring, but you should consider whether your business really needs access to all of the funds that the lender may be offering - but don’t forget to give your business some breathing space as well. If you need to withdraw more money than what the allowance permits, for example during emergencies, you’ll incur a penalty on top of the money that you’ve borrowed. Yet by asking to reduce the size of the allowance, you’ll be helping to minimise the risk to the lender and reassure them of your ability to afford the agreement.
How can providing security help?
Overdraft Replacement can be either Secured or Unsecured. But if your business adverse credit, applying for a Secured agreement could help make this form of finance more accessible. Secured agreement use your business’ unencumbered assets (equipment, machinery, vehicles, stock or property) as collateral. So, although Secured agreements often carry a lower interest rate compared with Unsecured solutions, this does mean putting these assets at risk of repossession should your business default. As such, you need to consider whether you’re willing to put assets at risk in exchange for a lower interest rate. In addition, you could offer a written or verbal Personal Guarantee expressing your commitment to repaying the agreement on time.
What can I do to improve my Credit Profile?
Although it won’t always be used against you, lenders will usually ask for permission to review your Personal and Business Credit Profile. This helps them to understand where you and your business stand financially. When assessing your Credit Reports, lenders incorporate into their search whether you have CCJs, Accelerated Payment Notices, Arrears, unpaid debts (eg. credit card debts) and whether you have a reliable history of paying off debt on time. If there are any issues that lenders need to be aware of you need to upfront. Should they find any issues that they weren’t made aware of it will affect the credibility of your application and make it harder to for you to gain an agreement. Nevertheless, possessing adverse credit is likely to affect the strength of your Credit Score, which lenders use to calculate the risks and determine how much interest they should offer. So, the weaker your score the more interest you’ll be charged on any funds you withdraw, and vice versa.
In addition, you can inspect your own Credit Profile with any credit agency (Experian, Equifax, Callcredit, etc.) before applying. This will give you an early opportunity to identify whether there are issues affecting your Credit Score. If there are, getting them resolved could raise your score and help you gain a more favourable interest rate, plus should you spot any irregularities, you have the opportunity to contact the credit agency concerned as soon as possible to get the issue corrected. Just remember not to do this too many times in a short period of time as this is also a factor that can negatively affect your score.
Are there any other costs involved?
As well as interest, you need to check whether there are any other fees involved that may affect the overall cost of finance. Although many lenders don’t charge setup costs you might be confronted with anything from commitment fees and legal costs to overdraft penalties. In order to know where you stand in this matter, inspect all documents that were provided and request a face-to-face meeting with the lender so that they can fully explain their costs. In addition, compare what other Overdraft Replacement providers may be charging. You can then use your findings to push for a lower interest rate, more favourable terms or have some of these costs reduced or negated.
Does your business need fast cash relief?
Making sure that your business has access to the funds it needs at short notice can feel like an impossible obstacle, especially if you’re an SME with adverse credit. Although you may have been turned down for an overdraft facility by your bank, it’s not necessarily the end of the road. By applying for an Overdraft Replacement you could establish a Line of Credit that could provide you with instant access to an agreed allowance. All you need to do decide which lender is appropriate for your business. But with so many choose from, how can you make an informed decision? Simple. If you need access to quick cash for any reason, apply for Overdraft Replacement or find out more with Rangewell.
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