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Refinancing
Almost all businesses need to go through periodic refinancing exercises,
whether replacing bank facilities, renewing overdrafts, obtaining bank term
loans, small firms loan guarantees scheme loans, factoring or capital
expenditure requirements. This is normal business practice.
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. As the market changes and
evolves almost daily, we cannot provide an exhaustive list of the financial
products available but we give our own view of the various methods below.
Refinancing:
Remember this section is not designed for ordinary business financing
solutions, rather it is for companies under pressure to find adequate
working capital.
Consider the products, weigh them up against the circumstances you find
yourself in and decide. If you want help to decide and find the most
appropriate suppliers of finance contact us. We know and have access to
almost all providers of these products and can point out the pros and cons
of each.
Click the options below for information on each form of refinance.
Bank Overdraft
Small Firms Loan Guarantee Scheme
Factoring
Asset Refinance
Stock Finance
Materials Finance
Business Angel Investment
Venture Capital
Directors Loans
After all that are you confused? Want help to decide what is appropriate?
Contact us - call us FREE on 0800 9700539 or fill out the
contact us form.
Bank Overdraft
Description
It may be possible to obtain temporary increases in facilities from the
bank. If the problem can be demonstrated to be shortlived the bank will want
to try and help. If the problem looks more deep-seated they may want more
investment from third parties (you). Prepare good information, your team’s
arguments and talk to the bank - early enough.
Advantages
Decision making process is usually short - if you have good information to
give the bank. The existing relationship is very valuable - banks don’t like
losing customers. It may ask for more detailed work to be done on the
figures, (despite the cost) this can be valuable exercise. It may help pave
the way to other financial products from the bank in future.
Disadvantages
If the bank cannot see how its money can be repaid (serviceability) or
cannot see how it can get the money back in the event of liquidation
(security) they will not lend. Ill-prepared requests for funds will be
looked upon less favourably. The bank may want a third view and ask for
investigating accountants to examine the business.
It may be more costly than existing finance. They will probably want more
security from the company and the directors - personal guarantees may be
demanded or increased if in place.
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Small Firms Loan Guarantee Scheme
Description
A government backed loan scheme to assist SME’s with working capital
requirements. Typically the DTI underwrite up to 75% (from 2003) of the loan. Banks vary
in their approach to the scheme but the DTI is actively encouraging its use.
Advantages
It can be good value and reasonably quick to raise this type of loan. The
investment criteria are perhaps less stringent than non-guaranteed
facilities. Capital and or interest holidays can usually be agreed. For
distressed companies this can be a lifeline while they return to
profitability.
Disadvantages
Not all applications are approved of course. If the company is clearly
distressed the bank and /or the DTI may reject applications. Can you raise
enough to provide a solution and adequate working capital whilst you return
to profit? Can you service the loan. Merely creating more debt is not a
solution where radical surgery is needed.
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Factoring
Description
You essentially sell the debtor book to a factoring company who then provide the company
with working capital advances against that asset. They will provide from
50-95% advance against the debtor book and charge around 0.5% to 3%
depending on the number of invoices, the quality of the book and how much
work is required. All your future invoices pass through the system and this
sharply improves cashflow. Not any more seen as "lending of last resort".
Advantages
If you debtor control is poor this can help. It is extremely flexible form
of finance - the facility can rise and fall as your needs dictate. If the
company is under pressure and your sales are growing it is a vital tool.
Finding the right factor can lead to much more efficient use of your assets
and the ability to plan production or activity - thereby creating improved
efficiency.
Disadvantages
Concentration in one or two customers can cause difficulties. It is
perceived as expensive - but it is providing the commodity you need - money.
Most banks have a factoring division - they may not be suitable for your
business - shop around. Any bank overdraft is normally repaid from the
advance from the factor (the bank’s main security is sold to the factor). If
you have very low margins or your debtors pay very slowly (more than 80
days) it is not probaly suitable.
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Asset Refinance
Description
Most companies depreciate their assets faster than the value of those assets
fall. Therefore, there are "unencumbered" assets to lend against. The assets
of the business form collateral for the lender to secure themselves against.
Assets include, property, machinery, stock (see stock finance). Used in
conjunction with, say, factoring this method can provide a package of new
finance to overcome distress
Advantages
It is usually a very quick method, access can be through commercial finance
brokers or other contacts. Contact us by email for help if required. Where a
short term crisis (say a large bad debt) has occurred this method can help
the company round the problem very quickly by efficiently using its assets
to raise cash. Better quality assets such as land and buildings can attract
good rates if interest. Now plenty of finance available for assets.
Disadvantages
Raising finance this way is not cheap. Where the company has unencumbered
assets it is tempting to raise cash against them but remember
NB: If the crisis is longer term can your company service the debt
repayments?
Costs vary but rates of interest on refinancing assets (ie where previous
debts are repaid and fresh advances made) can be as high as 35%. The value
of assets is established by the lender - it is never as much as you expect.
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Stock Finance
Description
A form of asset finance. Where the business carries stocks that are easily
value-able and resold (such as retail or wholesale or where manufacturers hold
stock for clients) then stock finance can be raised. The value of stock is
usually much less than that on the balance sheet and lenders lend according
to their own valuations.
Advantages
As part of a package of measures stock finance can be useful. It can often
be flexible and longer term advances can help cope with trade cycle ups and
downs. It can be relatively quick to organise .
Disadvantages
It can be costly and the stock will never be worth as much as you think. The
security may be difficult to assign. If the bank has a debenture in place
any finance raised may be taken by them to mitigate the exposure anyway.
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Materials Finance
Description
A form of finance to help business in distress (usually after a CVA or
Administration). The finance is provided to replace trade credit facilities
lost as a consequence of the insolvency. Some providers will fund outsided
insolvency. Used in conjunction with factoring it can help deliver the
company from failure. Email us for details.
Advantages
Very flexible - almost any product can be financed provided security is
given. The suppliers are not having to give credit to the company but they
do not lose sale. Efficient production can be achieved - knowledge that
stock will be available on time leads to better planning.
Disadvantages
Lenders typically want a CVA in place and an equity holding. Costs can be
seen as high - but sharply increased efficiency can cover the costs. Only
really suitable for factorable businesses. High material costs or low
margins can be difficult to fund as can staged payments from your customers.
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Business Angel Investment
Description
The classic UK equity gap problem is getting worse. Too small for venture
capital and too big a risk for the bank - where to turn? Angels can provide
a mixture of loans and equity to distressed or struggling businesses. Most
come from a business background and have lots of experience. They usually
take a longer term view and can greatly assist the directors grow the
company.
Advantages
With bags of experience an angel can be just what the growing or struggling
company needs. Chose carefully and the relationship can be very fruitful.
The funds can be flexible and inexpensive. Further rounds of funding can be
available. The fact that an investor is putting money in can also help
persuade the bank to increase funds available
Disadvantages
Chemistry can be difficult - they are going to be involved long term
therefore will take time choosing their investments. Equity: they will want
a position in the company and the depth of the distress or pressure will
determine how big a slice they require. Paucity: there are thousands of
angels but finding an appropriate angel, convincing them to get involved and
getting finance can be many months. Control: many angels will want control
at board level.
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Venture Capital
Description
Most small businesses in trouble are NOT suitable for Venture Capital. VC’s
invest in around 1 in 1,000 applications for finance and unless there is a
huge growth potential and an almost unique nature to the business it will
not get venture capital. If however the company is unusual in the above
regard then contact us by email with a synopsis and we will look at the
options with you.
Advantages
Most directors are aware that equity is "cheaper" than debt. Having a
quality non executive director to help guide the board (a pre-requisite of
most VC’s) is also a big plus. The company’s reputation and PR are enhanced.
Where growth is achieved and prospects remain good the ability to raise
further finance is enhanced
Disadvantages
Classically, shareholder directors see the dilution of their equity as a
no-go area. Would you rather have 70% of a company worth £10m or 100% of a
company worth £1m? VC’s only part with money after thorough due diligence,
it is hard work and costly. In the end you may not get the money. Only the
best management teams with the best ideas win through. It is very time
consuming - in a distress situation do you have 3-9 months to wait?
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Directors Loans
Description
It may be possible for the directors or senior people to raise funds
privately. This can then be loaned to the firm. Tax efficient repayment may
mitigate the PAYE due on directors pay. But if the company is insolvent,
repaying your loans in advance of the creditors may contravene the law. In
the event of a liquidation the monies may have to be repaid to the company!
Security may be taken for the loans - but this is a complex area.
Advantages
It is cheap, you remain in control of the financial process. It is usually a
quick method to raise finance. But be warned, taking out second mortgages
will require showing the lender the company’s accounts. You can repay the
loan as convenient to cashflow. It can carry zero interest (you can however
charge interest). Personal loans have never been more freely available
Disadvantages
If you had lots of money it would probably already be invested in the
business? Can you afford the repayments personally? If the company fails you
still have to repay the loans. The bank may take some of their existing
advance back after the funds are introduced. Finally, is the money you can
raise really ENOUGH money to solve the company’s problems?
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