|
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 soletrader has encountered a significant downturn event or is under
pressure, then he he/she must consider whether raising further finance
against their personal 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:
WARNING being a soletrader may preclude the availability of these
products.
Remember this section is not designed for ordinary business
financing solutions, rather it is for debtors 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
Factoring
Asset Refinance
Business Angel Investment
Personal Loans
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 you. Prepare good information, your team’s
arguments 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 bankruptcy
(security) they will not lend. Ill-prepared requests for funds will be
looked upon less favourably.
It may be more costly than existing finance.
Back to Refinance Options
Factoring
Description
You sell the debtor book to a factoring company who then provide the
buisness
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
business 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
This form of finance is usually only available to limited companies. You may
have to incorporate your business. We advise that this is always a more
preferable trading status when thingsd are tough!
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 suitable.
Back to Refinance Options
Asset Refinance
Description
Most businesses 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 business 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 business 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.
Back to Refinance Options
Business Angel Investment
Description
This form of finance is usually only available to limited companies. You may
have to incorporate your business. We advise that this is always a more
preferable trading status when things are tough!.
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.
Back to Refinance Options
Personal Loans
Description
It may be possible for you to take out a loan, these can be unsecured or
secured (usually on property). Think very carefully before taking out more
debt to pay off creditors, is the business viable? Are you just deferring
the inevitable failure of the business?
Advantages
Nowadays it is relatively inexpensive to borrow quite large amount of money.
It is usually very quick too unless you have a poor credit rating. You can
repay the loan as convenient to cashflow. 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? Finally, is the money enough to solve the
business's problems or is it deferring the inevitable?
Back to Refinance Options
After all that are
you confused? Want help to decide what is appropriate?
|
