Overtrading occurs when a company expands its sales and activity faster than its available working capital can support. The business may be winning contracts and posting rising revenues, yet simultaneously running out of cash because it must pay suppliers, staff, and overheads before customers have paid their invoices. Left unchecked, overtrading can force a profitable company into insolvency.
Warning signs of overtrading
- Creditor payments becoming increasingly late despite a full order book
- Bank overdraft permanently at or near its limit
- Debtor days lengthening as the business struggles to chase payments
- Stock levels rising faster than sales growth
- Directors drawing very little salary to preserve cash
These signals often appear together. A sudden large contract win is a common trigger — the costs are front-loaded but the revenue arrives weeks or months later.
Root cause: the working capital gap
The core problem is timing. Cash goes out before cash comes in. The wider that gap, the more working capital the business needs. Fast growth widens the gap because more raw material, labour, and overhead must be financed before invoice proceeds are received. Businesses that extend credit to customers while being required to pay their own suppliers on short terms are particularly exposed.
How to address it
The practical fixes fall into two categories: tighten the cash cycle (invoice promptly, chase debtors, negotiate longer supplier payment terms) and increase available working capital (equity injection or external finance). A revolving credit facility like Credicorp Flex provides a standing buffer that a business can draw as growth accelerates and repay as cash is collected — avoiding the peaks and troughs that characterise overtrading.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: What is working capital and why does it matter?, What are debtor days and how do you calculate them?.