The letter is dated three days ago. The facility is being withdrawn, the balance of £42,000 is repayable, and the account will be moved to the bank's business support unit. You are £31,000 overdrawn, wages go out on Friday, and the VAT is due at the end of the month.
Nothing in the letter is a mistake and nothing about it is unusual. An overdraft is a facility repayable on demand. That phrase sits in the agreement everyone signs and nobody reads.
Repayable on demand means exactly that
An overdraft is not a loan with a term. It is permission to go overdrawn up to a limit, which the bank can reduce or withdraw, usually without needing a reason and usually without a notice period. It is reviewed annually, and the review is not a formality even when it has been one for nine years.
What sits behind it matters as much as the facility itself. Most business overdrafts are secured. For a limited company that usually means a debenture giving fixed and floating charges over the company's assets, which is registered at Companies House and which anyone, including your suppliers' credit insurers, can look up. Many also carry a personal guarantee from the directors, sometimes supported by a charge over a house.
So the question of what happens when the facility is withdrawn has two answers: what happens to the company, and what happens to you. They are not the same question and the second one is why you take advice quickly.
Banks see the signs before you tell them anything
Your bank does not need your management accounts to know that trade has slowed. It can see your account.
The pattern that triggers a review is consistent: the balance sits close to the limit for months rather than swinging between credit and debit, unpaid direct debits appear, cheques bounce, HMRC payments stop going out on time, the account is used for cash withdrawals that do not look like trading, and credit turnover falls while the overdraft stays full. Add to that a set of filed accounts showing a loss, a late filing at Companies House, a county court judgment, or a change in the credit reference agency score for your sector, and a hard-working facility becomes a problem loan on somebody's list.
A permanently full overdraft is the biggest single signal. Banks call it hardcore borrowing: the portion of the overdraft that never gets repaid is, in reality, a term loan being run on an on-demand facility, and it makes the bank nervous because it means working capital has been permanently consumed.
The lesson before the letter arrives is to talk first. Banks respond very differently to a business that brings them a problem with a plan than to one they discover.
The first forty-eight hours
Do these in order.
- Work out your actual cash position for the next thirteen weeks, week by week. Receipts you are confident of, not invoices you have raised. Payments you cannot avoid: wages, PAYE, rent, the supplier who stops delivering.
- Find out exactly what is secured and by whom. Read the facility letter and any guarantee. Check the charges registered against the company at Companies House.
- Get proper advice before you make payments. Once insolvency is a real possibility, a director's duties shift towards the interests of creditors, and preferring one creditor over another, or continuing to trade while knowing there is no reasonable prospect of avoiding insolvent liquidation, carries personal consequences under the Insolvency Act 1986.
- Speak to the bank, and speak to them with the thirteen-week forecast in your hand. Ask what they actually want. Sometimes it is a reduction over six months rather than repayment on Friday, particularly if the alternative is an insolvency where they recover less.
Then talk to your creditors before you miss the payments, not after. HMRC operates Time to Pay arrangements, and the department is considerably more receptive to a business that rings before the deadline with a realistic proposal than to one that goes quiet and then offers an explanation in month four.
The alternatives are narrower but they exist
Replacing an overdraft is harder than keeping one, but the options are real:
- Invoice finance. If you sell to other businesses on credit, invoice discounting or factoring advances a proportion of each invoice. It is secured on the debtor book, which is why it is available to businesses banks will not lend to unsecured, and it converts a permanent funding need into something tied to sales.
- Asset finance. Refinancing vehicles, plant or equipment you already own releases cash against assets that were sitting idle on the balance sheet.
- Trade credit. A supplier who wants to keep your volume may extend terms, which is free funding, but it has to be agreed rather than taken.
- Government-backed lending. The British Business Bank's guarantee schemes for smaller businesses, currently the Growth Guarantee Scheme, work through accredited lenders and provide a partial government guarantee to the lender. The borrower remains liable for the whole debt, which people misunderstand.
What to avoid is the merchant cash advance taken in a panic at an annualised cost nobody has calculated, and any refinancing that converts an unsecured debt into a charge over your home without a clear plan for getting out of it.
If the bank has treated you unfairly rather than commercially, smaller businesses can complain to the Financial Ombudsman Service, which covers micro-enterprises and small businesses within published size limits, and there is a separate Business Banking Resolution Service for certain larger unresolved historic cases. Neither is fast, and neither pays Friday's wages, but neither is nothing.
Where this shows up in the game
In Business Baron the overdraft is a facility, not a feature. Run it at the limit for months and your bank's view of you changes quietly in the background, until a bad quarter produces a review you did not schedule. The game's lenders behave the way real ones do: friendly while the account swings, unsentimental when it stops.