RSS feedsWhether we plunge headlong into recession or simply flirt at its edges, there is little doubt that cash will be the critical make or break factor for businesses for the foreseeable future.
So how can a business raise finance if its performance is a bit sticky? There are obvious solutions: raise the funds from your own balance sheet either by raising debt funding of one sort of another, or raising capital from your shareholders. This is a matter of more efficient balance sheet management.
Another way is to turn to the existing debt funder the bank or, if in place, the invoice finance provider. This is the time that relationships with them will count, but regardless of that relationship the bank may not have faith in the business plan and agree to lend the cash but only in return for further security such as a home.
Invoice finance
While there is nothing wrong with these choices, there is another option. Invoice finance is an increasingly popular form of funding and comes essentially in two flavours. The first is disclosed factoring. The second is undisclosed, and is known as confidential invoice discounting, or CID.
Most companies prefer CID. Even though it doesn’t suit all industries, it is now generally available across the market from an assortment of bank-owned and independent providers.
Both factoring and CID require the company to sell its debtors to the funder in return for an advance of anything up to 85% of the face value of the debtors sold, with the balance less charges being paid on receipt of the cash.
With CID, the company keeps control of its sales ledger; with factoring, the factorer collects the sales ledger. But take care if a business already has an overdraft and given a debenture, the bank will reduce the facility if there is a plan to sell debtors to a CID funder.
Often CID-ers will offer additional funding, secured on stock, plant and equipment or on factory or office buildings. This is known as asset-based lending.
Remember that although a new loan facility will help cashflow, it will not improve your balance sheet the business is simply replacing one set of creditors with another on a longer repayment schedule.
The only way to get round this slight detail is to raise new equity. For a private company this will almost certainly come from the existing shareholders. If the drama has started and the crisis is in sight it is extremely unlikely that new shareholders, whether private or institutional, will share the dream.
The message once more is move quickly. Be objective and honest with yourself. Make excellent management information a must and use that information to inform your decisions.
Take quality professional advice it is money well spent and may just save a business playing out a drama. Always tackle the problem head-on before the need to raise the finance becomes critical.
Other options:
Balance sheet management
- Free, easy and in-house
- But it may upset customers
- And it can make suppliers twitch
Existing debt funder
- Less painful with existing relationship
- And it’s cheaper than equity
- But if they know you’re struggling, they could reduce your facility
New lender
- Offers new business perspective
- But unlikely to help underperforming business
- And information has to be compiled
Existing shareholders
- Have vested interest in the business
- And it’s not debt
- But you may lose some control
- And any share dilution may upset existing investors
Antony Fanshawe is the head of corporate finance and business recovery specialist Fanshawe Lofts
