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.
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.
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
Description You sell the debtor book to a factoring company who then provide the business 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 things 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.
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.
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.
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?
After all that are you confused? Want help to decide what is appropriate?