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. ibv 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.
Factoring & Invoice Discounting
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 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?
Director’s Loans
It may be possible for the directors or senior people to raise funds privately, this can then be loaned to the firm. 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.
