The definition of insolvency is being unable to pay your debts as they fall due.
There are a number of reasons why a business might become insolvent, from simply running out of cash to over-extending when growing, and many business owners think that they must wind things up at the first sign of trouble.
However, this often isn’t the case. If your business is currently struggling due to a cash flow problem, for example, there are a number of options available to you that could help you turn things around and rescue your business.
So, if you are facing financial difficulty and believe that your business could be turned around with a bit of extra cash, read on to discover the different options available for borrowing money for your business...
Cash flow is king
Of course, we aren’t suggesting that anyone continues to trade when they know that they are insolvent. What we are saying, though, is that planning ahead is always the key element to making the right decisions – and sometimes, the conclusion might just be that your company simply needs more cash.
Cash flow is the term used for the incomings and outgoings of a business over a certain period. It’s basically the movement of money in and out of a company’s bank accounts – and when your cash flow is good, it means that you’ve always got enough money coming in to be able to cover your outgoings.
However, if your company cash flow is poor and you are struggling to make payments when they are due, you could consider one of the following options:
12 options if your business is struggling to make payments:
1. Crowdfunding and peer to peer lending
If you need to raise money for your business, one potential option is crowdfunding or peer-to-peer lending.
Both options work on a model that connects businesses with individual and corporate investors using an online platform, with peer-to-peer funding focusing on interest-based lending, whereas crowdfunding is usually equity based.
This is not the best method if you're looking to improve your immediate cash flow problems, but it can help with long-term goals if you need a cash injection.
2. Merchant cash advances
A merchant cash advance is another option for borrowing money for your business that works by offering businesses a cash advance against future sales.
This type of financing is usually available to businesses with a steady volume of credit card sales, such as retail stores and restaurants. It works by businesses receiving a lump-sum payment from a lender which they then pay back as they make sales to customers.
3. Business angels
A business angel is an independent individual who provides capital for the development of a business. They also usually carry out the role of a mentor and offer their experience and know-how to those they are helping.
Business angels typically bring their skill and cash to the table for a percentage of the equity, but some can also offer a combination of debt and equity finance too. Find angel investors on the UK Business Angel Associate website.
4. Pension-led funding
Pension-led funding does exactly what it says on the tin: it sees business owners use their pension to invest in their business, without the requirement for charges over domestic property or personal guarantees.
Pension-led funding is the only form of business funding where the interest paid on the finance provided is paid back to the pension, therefore increasing the business owner or director’s wealth.
5. Asset finance
Another potential way to free up some cash is by financing your company assets.
Business assets can form collateral for lenders to secure themselves against – and used in conjunction with other methods such as factoring, this method can provide a package of new finance to overcome distress. Find out more about selling company assets in this blog.
6. Bridging loans
A bridging loan is a type of commercial finance that enables you to access funding over a short period of time.
They typically need to be repaid in one to 12 months, and although a bridging loan is a way to boost cash flow fast, it’s important to bear in mind that interest rates are higher with this type of loans, and you’ll typically have to offer collateral to secure it.
7. Business loans
Business loans are typically available from banks and can be used for anything the business requires, providing the lender is convinced that the loan will be repaid. The loan will be payable over a specific period of time and will often be accompanied by a personal guarantee for the director/shareholder.
8. Commercial mortgages
Available from a wide range of landers, commercial mortgages are used to buy business premises, extend or refurbish current premises or to release equity. A with a homeowner mortgage, the loan will be secured on the property.
Before applying for a commercial mortgage, you will need to have a financial statement, management accounts and a business plan, and it is crucial that the loan to value amount must stack up. Usually, lenders will advance between 65% and 80% of the purchase price or valuation.
9. Short term loans
An additional option is taking out a short-term loan. When taking out a short-term loan, alternative lenders give quick decisions based on the borrower’s credit file, so you can improve cash flow fast.
However, it’s important to bear in mind that short term loans always have a high interest rate – but if they are used correctly and paid off swiftly, they can be the ideal solution.
10. Invoice factoring and discounting
Invoice discounting is a type of debtor financing, where a finance company will advance a portion of your unpaid invoices, so you have immediate liquidity, whilst invoice factoring converts outstanding invoices due within 90 days into immediate cash.
The lender 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.
11. Spot factoring
Unlike traditional factoring, spot factoring allows a specific invoice to be factored and not the whole ledger. It avoids the obtaining of a floating charge over all company assets and is based on the providence of the debtor and not the company obtaining the finance.
As a result of the COVID-19 pandemic, there are a number of grants and loans available to businesses to help them get back on their feet.
The Restart Grant Scheme, for example, has been launched to support businesses in reopening safely, with eligible businesses entitled to a one-off cash grant of up to £18,000 from their local council.
Additionally, the Recovery Loan Scheme is another way to boost finance, with up to £10 million available per business and the government guaranteeing 80% of the finance to the lender.
How McAlister & Co can help
It goes without saying that any application for finance should be thoroughly prepared and presented to the right lender – and understanding what lenders are looking for, as well as who is lending to what sector, can be key in securing additional finance.
At McAlister & Co, we work closely with various brokers who can help to find the right finance product for you. For further information on borrowing money for your business, contact our team today to discuss your situation in complete confidence.