Financing options for distressed companies

As in any type of business distress, one of your first actions should be to speak to a specialist, providing you with an independent, objective view of your issues. An independent specialist can also help you with priceless advice on solutions that may not otherwise have occurred to you and allow you to tap into funding in a way that works for you.

Once you’ve got an advisor or advisors in place, you’ll be able to access financing options inherent in your business and you can also begin to identify areas where spending can be cut back. Here are some of the financing options that your business could turn to in a time of crisis.

Invoice financing

Many companies have a ready source of financing lying around the office that they essentially have no idea about: unpaid invoices. Invoices can offer a priceless form of financing and can be leveraged in a couple of ways to provide you with a much-needed cash injection.

- Invoice factoring

Through invoice factoring, your company sells its outstanding invoices to a third party, or “factoring company” (usually an independent finance provider or bank), at a discount. The factoring company then manages the business’ sales ledger and credit control, typically on a contract of around 24 months.

In return, the factoring company will advance funds up front (usually around 70-85 per cent) when the business invoices a customer. When the customer pays, the factoring company collects on the debt and makes the balance leftover available to the business, minus fees.

Invoice factoring offers the satisfying benefit of unlocking funds lying in unpaid invoices, providing you with funds without the usual waiting around for payment and chasing it up if its overdue. The downside to this, of course, is that you will be tied in to a contract with your factoring company. Also, with a third party chasing up your invoices, it is possible that previously friendly business relationships become slightly more strained.

- Invoice discounting

Invoice discounting is a similar funding source to invoice factoring, but differs mainly in that you remain in charge of your sales ledger. When you send out invoices, a pre-agreed proportion will be deposited to you from the lender, giving you regular injections of quick cash, with fees and charges deducted from the remaining balance.

Due to its key difference from invoice factoring, invoice discounting offers the benefit that you can maintain control of your relationships with customers. If you are a small business that relies on close and friendly ties with those you work with, then this can be particularly advantageous. However, it does mean that you retain some of the burdens that invoice factoring alleviates and could mean that payment times remain slow.

A Midlands-based recruiter placing part-time and permanent candidates in the FCMG sector had experienced sustained growth over its five years in operation, employing 25 staff. In light of this, and as the company sought to expand into other sectors, it purchased and relocated to new premises.

However, the business growth precipitated a cash flow squeeze, with the company barely making its working capital last from month to month, and any trading volatility may have pushed it over the edge. Faced with the urgent need to rectify this, the company engaged alternative funding provider Business Funding Shop (BFS).

Following initial discussions with the company’s directors, BFS saw that the company was not particularly effective in managing its sizable debtors ledger. Trade debtors were effectively using the recruiter as a free bank facility, with several owing money that was in excess of 120 days overdue. It was obvious to BFS that an invoice discounting facility was what the business required, in conjunction with more effective credit control procedures. BFS’s panel of invoice discounting providers was narrowed down to a provider with a unique fit for the sector and the company’s organisational requirements.

The chosen provider allowed the business to maximise its cash flow by releasing and advancing the funds tied up in its unpaid invoices. The company benefited greatly from the increased capital that invoice discounting provided, and combined with stricter treatment of debtors, enabled it to focus on further growth and its business plan and forecast.

Stock financing

Through stock finance, your company can borrow money against the value of stock held on your balance sheet, through a lender purchasing stock on behalf of a buyer. It is commonly on a 30-90 day revolving facility. Releasing value from your existing inventory can improve your cashflow and allow you to begin the process of turning your company around.

Stock finance is a particularly attractive option if your company’s assets are mostly in warehouse stock, releasing working capital that would ordinarily be tied up. As a revolving facility, it can enable access to capital as and when needed and allows you to retain ownership of the stock. Furthermore, stock financing typically involves matched funding, meaning that, if your inventory increases, so does your funding and cash flow.

This could enable you to use the funding you gain to purchase more stock, allowing you to maintain a steady cash flow. Stock financing can also be done in tandem with invoice factoring and can be managed by the same third party.

Asset refinancing

Like stock financing, asset refinancing allows you to access cash against things your business owns. Through asset refinancing, you secure a loan against items that your business owns, such as property, vehicles, equipment etc. In the event that you are unable to make repayments on the loan, the lender can recoup what you own by taking the asset.

This can be a particularly useful form of financing if your business holds valuable assets, as these will enable you to access greater sums of cash. It can also offer you the option to consolidate existing debts into something more manageable.

Generally, to be eligible for asset refinancing, the asset or assets in question must have high resale value, be critical to your business operations, be logged into your balance sheet and must be removable, to ensure they can be taken as security for the loan. When applying for asset refinancing, the lender will ask questions aimed at establishing a valuation of the asset(s) involved.

Once you have received funding, the ownership of the asset is temporarily taken on by the lender, but you retain the uninterrupted use of it for your business. Ownership is transferred back to upon full repayment of the agreement. The loan usually uses fixed monthly repayments of an agreed upon sum, with terms that extend as long as five years.

A caveat however is that you should be careful to consider the timeframe of the loan and the long-term use of the asset you intend to use. Be certain before entering into an agreement, in order to avoid ending up in a situation where you are making monthly payments on an asset that is no longer of use to your business.

Emergency loans

If you are in dire need of cash and none of the above options are feasible sources of funding for your business, then you might have to consider an emergency business loan to allow you to meet your short term obligations and keep you afloat while you seek to improve your cash flow. Emergency loans can include lines of credit or short-term loans that enable you to bridge gaps and give you some breathing space with creditors while allowing you to continue trading and paying your staff.

If your business has a history of profitability, a good business model and can show the ability to pay an emergency loan back, then this could be a viable option. On the positive side, emergency loans can be the last thing to prevent your company entering administration or insolvency or having to agree a Company Voluntary Arrangement (CVA) with creditors. They provide extremely quick cash and, if you are confident that you can turn things around, can be the perfect boost to enable you to weather the hard times.

However, emergency loans predictably come with serious drawbacks, not least the high costs associated with them. Due to the risk involved in an emergency business loan, lenders will typically charge high interest rates and fees. Taking on an emergency loan while in a distressed situation also adds yet another creditor to your business and you’ll need to be sure you can pay the loan back before taking it on.

Furthermore, if you have a young business, with limited history of profitability, or if you are in a position where it seems like a loan would be unlikely to make much of a difference to your long-term future, traditional lenders will be hesitant to lend to you without a personal guarantee. In such an instance, exploring options such as administration or liquidation may be wiser than seeking alternative means of funding.

One particular solution can be to seek emergency funding through an investment firm as part of a restructuring process. In this instance, the lender will provide funding, whilst also working with you on restructuring your business model. This can be less risky than an out and out loan, but be prepared to work with a hands-on restructuring specialist.

Government assistance (COVID-19)

The current climate is obviously extremely tough for businesses of all sizes. Formerly profitable businesses that have never had a hint of financial trouble are feeling the squeeze from the world’s economic lockdown. If your business was viable and not in difficulty prior to the coronavirus pandemic, but now finds itself in a distressed situation, then exploring one of the many government-backed assistance schemes is an absolute must.

If you’ve been hit by cash flow difficulties, then you might consider the Coronavirus Business Interruption Loan Scheme (CBILS), to help you weather the pandemic. CBILS offers interruption payments of up to £5 million through over 40 accredited lenders, with the first 12 months of interest payments and lender-levied fees covered by the government.

There is no guarantee fee for access and any loans granted are available on repayment terms of up to six years, with finance terms of up to six years for term loans and asset finance facilities and up to three years for overdrafts and invoice finance facilities. The scheme may also be used for unsecured lending for facilities of up to £250,000.

All you need to do to be eligible is to be a UK based company with turnover of up to £45 million that generates 50 per cent of turnover through trading activity. You must also be able to convince a lender that your business would be viable, were it not for the pandemic, and that you will be able to trade out of any short- to medium-term difficulty after the pandemic.

Other government-backed coronavirus assistance schemes include the Coronavirus Large Business Interruption Loan Scheme (CLIBLS), which offers loans on similar terms as CBILS but to companies with turnover between £45 million - £500 million, or the “Bounce Back” loan scheme which aims to provide quick, government-backed loans of £2,000-£50,000 (up to 25% of a business’ turnover).

While finding your business in a distressed scenario can often feel like a hole you’ll never get out of, there often can be light at the end of the tunnel. If your business is truly a viable one, then it is worth seeking the funding to keep it going even when times are at their toughest. It might be a difficult process to get your business back where you want it, but with the right funding you can get yourself on the right track.

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