It’s pretty much impossible to run a small business without incurring some kind of debt. From daily running costs to business expansions, the use of loans and credit cards means that most businesses will have a manageable amount of debt. However, things can change quickly; cash flow problems can arise, debts can mount and you might find you can’t make money fast enough. You could start to become overwhelmed, but don’t worry, though - help is at hand! Read on to discover our best debt finance advice...
The lowdown on refinancing
Refinancing and debt consolidation are pretty common in the business world. In fact, almost all businesses will go through periods of refinancing, from renewing overdrafts and factoring/invoice discounting or even obtaining bank loans - it’s normal business practice. In its most basic terms, refinancing is the process of taking out a new loan to pay off an old one. By doing so, you can source a loan with more favourable terms, such as a lower interest rate and/or a longer repayment duration. So, if your company is under pressure, we explore the best debt finance options available below.
If your cash flow problem will be short lived, you could ask your bank to temporarily increase your overdraft. You’ll need to prove that the problem is solvable with a short-term extension, so make sure you’ve got all the information and evidence to hand and make sure you talk to your bank as soon as possible - don’t wait until your company is on the brink of insolvency and you can't pay VAT or PAYE as banks will rarely lend in these circumstances. However, beware that you might be asked to provide additional personal security such as personal guarantees secured against your home.
Enterprise Finance Guarantee loans
An EFG loan is a government-backed loan guarantee scheme to encourage further lending to viable SMEs who might have been turned down for normal loans due to a lack of security or a proven track record. It essentially allows you to still borrow money via the scheme - however, the lender must be satisfied in your ability to repay the loan and must believe that your business has the potential to succeed and grow.
Factoring and invoice discounting
Invoice discounting is a process whereby a company raises money against invoices through a financial institution, and factoring is where a company sells its invoices to a funder or bank. Both are very powerful business tools where you essentially raise money from your debtor ledger. The lender will look at your invoices, customer base, and your overall business, and decide how much to lend based on the quality of their risk. They will then provide you with working capital advances against that asset - which can be up to 90% of the invoice value, although 75%-80% is the norm.
Usually, all of your future invoices will pass through the system, which significantly improves cash flow, and you don’t have to disclose invoice discounting to your customers, so they will never know your debtors are financing your company. The finance company will set up a new bank account in your company’s name to collect customer payments and you will then be allowed to ‘draw down’ those funds when they have cleared. This is an excellent solution for small businesses because it can help the company grow, it is relatively inexpensive and the risk is low.
Stock and asset refinance
Business assets can form collateral for lenders to secure themselves against. These assets can include property, machinery or stock, and used in conjunction with other methods such as factoring, this method can provide a package of new finance to overcome distress.
It may also be possible for directors to raise funds privately that can then be loaned to the business. Tax efficient repayment may mitigate the PAYE due on directors pay. However, if the company is insolvent, repaying your loans in advance of your creditors may contravene the law, and you could create a potential preference (as per Section 239 of the Insolvency Act) if you put money into an insolvent company and then pay yourself back.
Company Voluntary Arrangement
A company voluntary arrangement is another way to resolve your business’ debt and financing problems whilst continuing to trade. It’s a powerful tool that allows you to make an arrangement with your creditors so you can pay off your debts in an affordable and sustainable manner for an agreed amount of time; once that period is up, the rest of the debts are written off. Benefits of a CVA include an improved cash flow, shareholders can retain control, it’s not publicly announced, it costs less than administration and your creditors have a greater chance of being paid what they are owed.
Seek advice as soon as possible
If your company is facing financial difficulty, it’s important to seek expert advice as soon as possible so you can explore the best debt finance options. The sooner you reach out and ask for help, the more options you will have available to you. At McAlister & Co, we are Licensed Insolvency Practitioners who provide advice on business insolvency to Directors, Sole Traders and Partnerships.
From obtaining a valuation of your business assets and dealing with your creditors to protecting your home and personal assets, our dedicated team will help take the stress out of this complicated time. There’s no need to face financial difficulty alone - call us now for FREE initial advice.