An importer and wholesaler in the fast-moving consumer goods (FMCG) sector found itself in a tight spot. The business, while still profitable, had seen a reduction in revenue due to the challenging retail environment. This downturn led to a breach of its bank’s covenants—conditions set by the bank to maintain certain financial standards. In this case, the company fell short on its interest cover ratio and equity requirements.
Understanding Banking Covenants, Equity, and Interest Cover: Banking covenants are conditions a lender sets to protect their investment. These often include maintaining certain financial ratios. The interest cover ratio, for example, measures how easily a business can pay the interest on its debt. If a company has a high-interest cover, it means it can comfortably meet its interest payments even if profits dip. In this situation, the business could still cover its interest payments but not to the overly high standard set by the bank. Despite this, the bank treated the breach as a red flag.
Equity refers to the value of an owner's interest in the business after all debts have been deducted. Although the business had OK equity in its balance sheet, it wasn’t as high as the bank wanted. Even though the owners had significant equity in a property that the bank also had security over, they refused to ease their requirements . This rigidity created a cash flow crunch, especially when the business needed funds to build up stock for the upcoming Christmas and summer peak season.
The Bank’s Inflexibility and the Need for Cash Flow: Many businesses in the current market cycle have experienced reduced revenue and tighter margins, making it difficult to meet the lofty standards set during more prosperous times. The bank's inflexibility put additional strain on the business, as their existing overdraft did not scale with the need for increased cash flow. Traditional bank overdrafts are typically fixed and do not grow with a business's increasing sales or seasonal demands. In this case, the business needed more capital to stock up for the peak season, but the bank's overdraft limit remained static, offering no room to manoeuvre.
Lock Finance Offers a Custom Solution: Recognising the business's potential and unique needs, Lock Finance stepped in with a more flexible approach. They offered an invoice finance facility that was double the size of the company's existing bank overdraft. Invoice finance allows a business to convert its unpaid invoices into immediate cash. Unlike a bank overdraft, which is usually capped at a fixed amount, invoice finance scales with the business. As sales increase and more invoices are generated, the amount of accessible cash also grows.
This meant that the more the business sold, the more cash flow it could unlock—perfect for building up stock and preparing for peak trading. By offering twice the amount of the bank’s overdraft, Lock Finance provided the immediate cash flow relief needed. This tailored support gave the business the financial breathing room to operate without worrying about breaching banking covenants or risking property assets.
Key Insight for Business Owners: This case highlights the limitations of traditional banking, particularly when banks impose inflexible covenants that do not reflect the current economic landscape. Interest cover ratios, equity ratios and fixed overdrafts can quickly become a burden rather than a support. Cash flow is the lifeblood of any business, and traditional bank facilities often fail to scale with a company’s growth or seasonal demands. Invoice finance offers a dynamic alternative, growing alongside your sales and providing the working capital needed when it's needed the most. Lock Finance proved to be a true partner, offering a custom solution that adapted to the business's needs rather than constraining them.
In Summary: When faced with a rigid bank that imposed high-interest cover standards and a static overdraft, this importer wholesaler turned to Lock Finance. Through invoice finance, Lock Finance provided double the overdraft, offering a scalable, flexible cash flow solution. This allowed the business to focus on preparing for a successful peak trading season without the stress of restrictive banking conditions.
Remember, a business can only run out of cash once.
