Business Rescue - Refinancing

Also read: Business Turnaround | Trading Out | Cessation

All businesses need to review their finance from time to time. If a company is experiencing difficulties, then the directors have to consider whether raising further finance against assets is the solution to their problems. Almost all businesses need to go through periodic refinancing exercises.

Is Refinancing for your Business?

Where a company has encountered a significant downturn event or is under pressure, then the directors must consider whether raising further finance against assets is the solution to their problems.
There are several forms of refinance: Bank Overdraft, Small Firms Loan Guarantee Scheme, Factoring, Asset Refinance, Stock Finance, Materials Financ, Venture Capital or Directors Loans

Bank Overdraft

If you believe the problem is going to be short lived, then you can attempt to prove this to your bank, which would then be more readily willing to help you. You must present them with good information early on and it should unquestionably back up your belief of the problem being temporary. This will serve to keep your relationship with your bank a valuable one to them as they would prefer not to loose custom.
If however the bank cannot see how they are going to get their money back even if your business goes into liquidation they will simply not lend you any more money. They may ask for personal guarantees from the directors as security.

Small Firms Loan Guarantee Scheme

This is a government backed loan scheme which guarantees loans from banks and other financial institutions, for small firms that have viable business proposals yet have been unsuccessful in obtaining a conventional loan because of lack of security. SFLG guarantees 75% of the loans. In return for the guarantee, the borrower pays DTI Department of Trade and Industry a premium of 2% a year on the outstanding amount of the loan.
To be eligible, you must be a UK company with an annual turnover of no more than £3m (£5m if you are a manufacturer). Many business activities are eligible but there are a number of exclusions. Loans are available for most business purposes although there are some restrictions. This type of loan can be arranged quickly and is usually good value.
All applications will be scrutinized and not all will be accepted especially if a company is clearly struggling.

Factoring

If your company has cash flow problems and you have a lot of debtors then one way in which you can vastly improve cash flow is that you can essentially sell your sales ledger to a factoring company, this provides your company with working capital based on 50-95% of the value of your sales invoices. The factoring company’s fees for providing you with this service could be anything from 0.5% to 3% and would be dependent on the amount of work required. You would also pass on any new sales invoices to the factoring company this would continue to provide your own company with the cash flow it needs. Factoring can be a very flexible form of finance it can help you plan production and improve your company’s efficiency.
You should shop around for the right factoring company for your business.

Asset Refinance

A Company’s assets, which could be such things as machinery or stock can be looked upon as collateral for any lender and they enable the lender to have some security, as they can look to secure themselves against these assets. Companies do tend to depreciate the value of these assets a lot quicker than they actually do depreciate. By entering into this sort of arrangement a once struggling company can find themselves with new finance to overcome their difficulties. Raising cash through assets can help a company resolve a problem quickly and efficiently and is most helpful where a short term crisis has occurred. This asset refinance is usually done in conjunction with some other form of action like Factoring in order to help a company as much as possible.

Stock Finance

If a company that is in trouble has stock that is viewed as being very easy to resell, or is very valuable, then this is where the company can consider stock finance which in effect is a form of asset finance. However before deciding that this is the way to go it must be noted that any lender will not pay what you think they should for your stock, as stock value is usually deemed by them as much less than that stated on the balance sheet.

Venture Capital

This avenue is not suitable for small businesses as thousands of businesses apply and very few will be successful. Venture Capitalists are looking for a company who’s growth and potential is really assured in their eyes. They will only invest in your company if they believe it has an obviously successful future, after all they want to a good return. However if the company is really unique and a future can be foreseen by the VC then it could stand a chance of obtaining venture capital. It is only the very best companies that will get through this way, and it can be rather expensive.

Directors Loans

Directors of a company can actually raise funds for their business privately. This money is then loaned to the company. Tax efficient repayment may then make the PAYE due on directors pay more moderate. However if the company is insolvent, you can actually find that you are breaking the law by being seen to have repaid your loans in advance of the creditors.
If you are thinking of raising money by taking out a second mortgage it should be noted that you will have to show the lender your company’s accounts. If a director does raise money for the company himself of course this could carry zero interest unlike a loan.