Finance and Refinancing in 2012/13
Almost all businesses need to go through periodic refinancing exercises, whether replacing bank facilities, renewing overdrafts, obtaining bank term loans, EFG loan guarantees scheme loans, factoring/ invoice discounting or capital expenditure requirements. This is normal business practice. Raising working capital is an important plank in any growth plan. At least it was until the credit crunch and recent banking difficulties see lending to SME sharply reduce in 2011-12
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 current market for business changes and evolves almost daily, we cannot provide an exhaustive list of the financial products available but we give a simple guide to the options available to you below.
We assume that the business is not a prime candidate for lending.
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 dozens of providers of these products and can point out the pros and cons of each.
• Bank Overdraft
• Enterprise Finance Guarantee Loans
• Factoring and Invoice Discounting
• Asset Refinance
• Stock Finance
• Business Angel Investment
• Venture Capital
• Directors Loans
• Credit Card Merchant Advance
• Company Voluntary Arrangement
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.
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 often want to try and help. If the problem looks more deep-seated the bank may want more investment from third parties (you). Prepare good information, your team’s arguments and talk to the bank - early enough. Dont wait until you cannot pay PAYE and VAT (LINK) as this is a sign that the company is probably insolvent. Rarely will banks allow extension of facilities for this purpose in 2012.
If however your business looks like turning the corner you could offer to provide additional personal security such as personal guarantees (PG) secured against your home. If you are not prepared to back your hunch with a PG, then ask yourself why should the bank provide money at increased risk to the bank?
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 already in place. More than 75% of applications are being rejected for overdrafts according to the media in 2012, so if you are going to apply for an increased facility or a new overdraft BE PREPARED!
Enterprise Finance Guarantee Scheme
A government backed loan scheme to assist SME’s with working capital requirements. Typically the DBIS underwrite up to 75% of the loan. Banks vary in their approach to the scheme but the DBIS is actively encouraging its use.
It can be good value but is never 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.
If you need to raise this type of loan rememebr it cannot be used to service arrears of VAT and PAYE
Not all applications are approved of course. If the company is clearly distressed the bank and or the DBIS 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 may be needed. Think of a CVA and restructure the costs AND improve working capital.
Factoring & Invoice Discounting
You essentially sell the debtor book to a factoring company who then provide the company with working capital advances (effectively a loan) against that asset. They will provide from 50-95% advance against the debtor book and charge around 0.33% to 2% depending on the number of invoices, the quality of the debtor book and how much work is required.
Usually all your future invoices pass through the system and this sharply improves cashflow. Not any more seen as "lending of last resort". Some companies can now even offer finance based on one invoice! The provider just looks at the history of the debtor. Talk to KSA if you need a new factor, specific spot factoring or just some guidance.
Factoring means that the customers know you are borrowing money against their invoices from you. Confidential invoice discounting (CID) usually means this lending is discrete and the customer doesn’t know.
If your debtor control is poor this can help. It is an 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.
If your business is growing this can grow with you, if sales are shrinking it can be a flexible facility but see below.
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. BUT in the current climate big bank factoring facilities are less flexible than the small more nimble factoring companies.
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 probably suitable.
Talk to Keith Steven on 07974 086779, if you need to find new flexible factoring or CID facilities
Most companies depreciate their assets faster than the value of those assets fall. Therefore, there are often "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. And in 2012 the options available are far fewer than 10 years ago.
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?
Call us for a CVA now! 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.
Stock Finance (very limited availability)
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.
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.
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.
BUT isn’t it better to own say 75% of a company with value than 100% of nothing?
Speak to Keith Steven on 07974 086779 if you think this is a product that you need.
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.
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?
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! This is a possible minefield.
Security may be taken for the directors’ loans - but this is a complex area and needs proper advice
Beware you could create a potential preference (s239 Insolvency Act 1986) if you put money into an insolvent company and then pay yourself back!! Call Keith Steven for smart, expert advice 0800 9700539 or 07974 086779.
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.
In 2012 mortgage providers are lending less than 45% of the amounts in 2007. A distressed set of accounts will make borrowing harder. You can of course use credit cards and personal loans (unsecured) but the lending criteria for these product have also hardened in 2011-12. Remember if you lend the money to the company and then take it back out BEFORE liquidation this is a possible breach of the rules.
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?
New Finance products
There are several web based crowd funding sites. Essentially you pitch to the investors and if they like your model they will provide equity or debt to the business. You will need a GREAT pitch, good accounting information, forecasts and a business plan.
Call Keith Steven now for a guide to this innovative route to financing your business.
Credit card finance – merchant loans
This is like factoring above. Effectively you obtain a loan against the future credit card receipts in the business. So if you had sales of £100,000 on credit or debit cards last year; you can borrow £10,000-12,000 against this. Great for a short term tax problem say, and relatively easy to obtain with no security or PG required.
KSA can now offer this facility to eligible clients CLICK HERE for full details
If you have a funding requirement have you thought about postponing ALL unsecured debts, collecting in debtors and work in progress and cutting costs? This huge increase in working capital is the impact a company voluntary arrangement can make.
So if the bank says no we can say yes!