Four ways a business owner can bounce back from a bad financial record

After the difficulty of the past few years, very few companies can say that they did not hit a financial bump in the road at least once.

“As the markets continue to tighten, many small business owners are looking for working capital to keep their operations going. Business owners who experienced financial difficulty and defaulted on loans in the past might think lenders will not consider them, but there are ways to recover,” Gary Palmer, CEO of Paragon Lending Solutions, says.

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He shares these tips to bounce back from a bad financial record:

Own up to the issues

A good credit rating is worth its weight in gold, but someone who may have had some difficulty in the past but has done whatever they can to rectify the situation, will still be considered by lenders, Palmer says.

For example, a small business owner who runs a profitable company might choose to help a friend to start their own venture by providing surety and then by no fault of their own, the new business may fail and the business owner might be left in a position where they have to honour the suretyship or face a judgement for bad debt. 

“Unfortunately, there are many instances like this, where responsible individuals become victims of circumstance. However, if the business owner contacted the bank and arranged to pay off the liability given the suretyship agreement signed, stuck to that repayment schedule and honoured their commitment, there would be no blemish on their record,” Palmer says.

It is important to remember that (with a client’s consent), all lenders will perform credit checks, conduct searches on court judgements and even carry out social media checks to vet applicants and see if they have a bad financial record. There is no way to hide an adverse financial record, should you have one and it is best to deal with it upfront if you do.

“Before this process even begins, it is vital to have a frank discussion with the lender and disclose any relevant issues to date. If the lender finds anything untoward when they do their investigations, chances are they will simply walk away from any future engagement.” 

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Realise that ignorance is not a defence

Some people are genuinely not aware that they may have a black mark on their credit history. However, Palmer points out, this is not an excuse in the eyes of a lender. “It is imperative to run a credit check with the various bureaus before even approaching a lender. Dealing with your past and taking remedial action to clear your name will significantly improve your chances of accessing future funding.”

Prioritise good financial behaviour

Lenders will also consider the reputation of shareholders and board members in the business, Palmer warns. “If they are in good standing and have a solid reputation in the market, this can be a useful way to bolster how lenders rate your risk. If your partners are dealing with financial indiscretions, be sure you are up to speed and disclose any concerns to relevant parties. Of course, the best thing all round is to stay out of financial trouble.”

Planning for the bad times is the best way to ensure that you do not find yourself clawing your way back to good standing with creditors. Prioritising the right processes in your business, such as ensuring you are cash positive can make all the difference to working with a lender to successfully grow your business.

“If necessary, you can even find a team of professionals who can help you stay on the right side of tax and legal requirements, as compliance will also be a factor your lender will look at. Making sure you do not have bloated operating expenses and that you have adequate overdraft facilities in place for the unexpected are always sensible, but especially important when the market tightens.”

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Factor in interest rates

All business owners should be factoring in movements in interest rates. While the Reserve Bank has continued to hike rates, there is a sense that rates might level off or reduce.  It may be time to consider a variable interest rate instead of a fixed interest rate, Palmer says.

“The South African business psyche is not a forgiving one. Unlike the US, where failure is seen as part of the journey, South Africans are expected to sign surety and should they fail will struggle to secure new funding. 

“Fortunately, the good news is that with more banks entering the local market as well as the growth in the alternate lending space, there is now more competition for your business. This will mean there are more institutions and lending partners who may be willing to work with you.”