Guide to Refinancing/Products Available
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 partners 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.
Remember this section is not designed for ordinary business financing solutions, rather it is for businesses 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.
Trading as a partnership may preclude the availability of any of the products discussed below.
Click the options below for information on each form of refinance.
- Bank Overdraft
- Small Firms Loan Guarantee Scheme
- Asset Refinance
- Stock Finance
- Materials Finance
- Welcome to Company Rescue
- 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
It may be possible to obtain temporary increases in facilities from the bank. If the problem can be demonstrated to be short-lived 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 teams arguments talk to the bank - early enough.
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.
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.
Small Firms Loan Guarantee Scheme
A government backed loan scheme to assist SMEs with working capital requirements. Typically the DTI underwrite up to 85% of the loan. Banks vary in their approach to the scheme but the DTI is actively encouraging its use.
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.
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.
You 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".
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.
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 banks 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.
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.
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.
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 (i.e. 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.
A form of asset finance. Where the business carries stocks that are easily valuable 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.
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 .
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.
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 outside insolvency. Used in conjunction with factoring it can help deliver the company from failure. Email us for details.
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.
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.
Business Angel Investment
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.
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
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.
Most small businesses in trouble are NOT suitable for Venture Capital. VCs 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.
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 VCs) is also a big plus. The companys reputation and PR are enhanced. Where growth is achieved and prospects remain good the ability to raise further finance is enhanced
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? VCs 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?
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.
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 be more freely available
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 companys problems?