Over the past two years, a striking pattern has emerged in the types of businesses that come to us for help. Companies that are fundamentally viable — with real customers, genuine revenue, and capable teams — are finding themselves in acute financial distress not because the business has failed, but because the cost of servicing debt has outstripped everything the business earns.

The source of that debt is almost always the same: alternative finance taken on quickly, often to solve an immediate cash crisis, without a full understanding of what repayment would actually require.

The Short-Term Logic

The decisions that lead to this situation are rarely reckless. A company needs to make a PAYE payment this week. A major supplier is threatening to stop supply unless an invoice is paid. A customer has delayed a large payment and there is a gap in working capital. The business is fundamentally sound, just temporarily squeezed.

Traditional bank lending is too slow. The overdraft is at its limit. A director searches for alternatives and finds that several lenders will advance £200,000, £300,000, or more within 48 hours on the basis of recent bank statements. The application is straightforward. The funds arrive quickly. The immediate problem is solved.

What is less immediately obvious is how the repayment will work.

How Factor Rate Loans Are Structured

Most of these fast-access business finance products — merchant cash advances, revenue-based loans, working capital facilities from specialist alternative lenders — do not charge interest in the conventional sense. Instead, they apply what is known as a factor rate: a fixed multiplier applied to the amount borrowed at the outset.

A factor rate of 1.5 on a £200,000 advance means the total repayment obligation is £300,000 — fixed from day one, regardless of how quickly the loan is repaid. This is fundamentally different from an interest-bearing loan, where the cost accrues on the outstanding balance and early repayment saves money.

With a factor rate loan, there is nothing saved by repaying early. The £300,000 is due whether paid over six months or twenty-four. A director who believes the facility can be cleared quickly to reduce the total cost has misunderstood how the product works.

The Repayment Schedule

Repayments on these facilities are typically set at levels designed to be collected over a fixed period — often twelve or twenty-four months. The lender's model is based on the company's historic revenue, not its forward-looking profitability after debt service.

A business generating £50,000 per month in revenue but only £10,000 per month in operating profit may find itself committed to monthly repayments of £15,000, £20,000, or more. The revenue supports the repayment schedule in the lender's model. The profit does not.

The gap between what the business earns and what it must repay has to come from somewhere. In most cases, it comes from working capital — and from other creditors. HMRC is often the first to receive a reduced payment, or no payment at all, as loan repayments take priority. The company that took on debt to solve one problem has created a larger one.

The Balance Sheet Problem

There is a further complication that many directors only discover when it is too late to act effectively. The liability recorded on the balance sheet often reflects only the amount borrowed — not the total contractual repayment obligation.

A company that borrowed £500,000 and has a total repayment obligation of £975,000 may be recording a £500,000 liability. The remaining £475,000 — the cost of the facility — may sit entirely off the balance sheet. The company appears better capitalised than it is. The directors may genuinely not know the true extent of what is owed.

This matters because decisions about the company's solvency, its ability to pay creditors, and directors' duties are all made in the context of what the balance sheet shows. A misrepresented balance sheet leads to misguided decisions.

What Can Be Done

If a company is in a facility where repayments are creating financial difficulty, there are options — but they depend heavily on timing.

When repayments begin to feel stretched but the company has not yet defaulted, the range of options includes direct negotiation with the lender, refinancing with longer-term capital, a Company Voluntary Arrangement, or operational restructuring to improve cash generation. Most lenders, faced with an engaged director and a credible plan, will consider restructured terms rather than the cost and uncertainty of enforcement.

When the company has already defaulted, when personal guarantee demands have been issued, or when other creditors are pressing for payment, those options narrow. The outcome that was achievable three months earlier may no longer be available.

The most consistent observation we make in these situations: the directors knew something was wrong earlier than they acted on it. A frank conversation with a professional at the point when repayments began to feel uncomfortable would almost always have opened more doors than waiting until a crisis forced the issue.

The Right Time to Act

If your company's loan repayments are consuming more cash than its operations generate — or if servicing the facilities is causing HMRC or other creditors to wait — that is the moment to seek advice. Not when enforcement begins. Now.

A confidential conversation with a turnaround professional costs nothing and could determine whether the business, its jobs, and your personal financial position can be protected.