Re-Financing Options
Link to Case Study

Almost all businesses need to go through refinancing exercises during its lifetime, whether replacing bank facilities, renewing overdrafts, obtaining bank loans, invoice discounting & factoring or capital expenditure requirements.

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.

You will need to consider the options, weigh them up against the circumstances you find yourself in and decide. Inspired Business Vision will be able to provide guidance on the type of finance that best suits your requirement. We have access to many providers of finance and can point out the advantages and disadvantages of each.

A summary is provided below of some of the main types of finance that may be available in a refinancing situation:

Bank Overdraft

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). The advantages are that the 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. They will probably want more security from the company and the directors - personal guarantees may be demanded or increased if in place.

Enterprise Finance Guarantee Scheme

A government backed loan scheme to assist SME’s with working capital requirements. 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. If the company is clearly distressed the bank 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.

Factoring & Invoice Discounting

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 or invoice discounter can lead to much more efficient use of your assets and the ability to plan 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. 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 probably not suitable.

Asset Refinance

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, and equipment. 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 of raising finance. 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 provide good options with regard to raising finance. Raising finance this way is not cheap. Where the company has unencumbered assets it is tempting to raise cash against them but remember, if the crisis is longer term can your company service the debt repayments?

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 significant experience an angel can be just what a 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.

Directors Loans

It may be possible for the directors or senior people to raise funds privately, this can then be loaned to the business. Advice should always be taken if you are planning to do this, and the loans should be documented as they would be with a third party. A Director’s loan can also be secured so that if the business is unable to continue trading in the future the loan will be a secured creditor after any security already in place.  If the company is insolvent, repaying your loans in advance of the creditors may contravene the law, therefore correct advice is essential.

 Contact Us now to see how we can help your business consider its refinancing options.

Link to Case Study

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