Raising Finance

Business turnarounds usually involve an initial cash crisis which needs to be funded if you are to survive, and then successful ones often also involve raising new business finance to support the businesses regrowth. This article looks at the sources of turnaround funding and in particular when to use a business loan broker to find specialist funding.

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The focus of this article is on surviving an immediate cash crisis, as the type of funding you will need to arrange to finance the business’s future development will depend very much on the nature of the business and your plans for it.

At both points in the process however, funders’ confidence in both the business’s management and its ability to generate the forecast cash flows are likely to be low due to its current situation or recent history. This inevitably makes raising external funding more difficult in distressed situations than in normal ones and so the first area to look at, and one usually with most immediate impact, is to see what funds can be generated from within the business.

Freeing up cash from within the business

The first requirement is a short term cash flow forecast covering either 13 weeks or in extreme cases on a daily basis, covering only the next few weeks. This should be a straightforward document prepared methodically and showing the expected movements of real cash into and out of your business to give a net movement (flow) of cash into or out of the company each day or week.

You can then start to use this document to actively manage the cash you have available to ensure survival, as well as both obtaining proper advice as to whether to continue to trade (to protect your personal position), and in seeking outside funding. This cash flow may help you identify areas of the business that are losing cash and to target these for action and it may flag up deals that you will need to do with creditors. But you should also look at your assets to see where you have cash tied up in assets which could be released.

Can you refinance or even sell some plant and machinery?

Do you have a backlog of debtors that should be chased in?

Could you operate more leanly and reduce your raw materials, work in progress and finished goods stock levels? Specialist consultants may be able to help in all these areas.

Ultimately you will be taking steps to improve the businesses profitability which in the longer term should translate into business cash so long as you manage the working capital requirements properly.

Putting more of your own cash in

If you are confident in the business you may choose to put more of your own cash in, either as equity or as a director’s loan, raised either from other investments or by borrowing.

If you put money in by way of a loan there is nothing to stop you charging the business an appropriate rate of interest and you may also be able to take charges over the company’s assets as security.

But you should not simply put more money into a business unless you are both making all the changes necessary to restore it to health, and putting in sufficient money to see the changes through, (an old Insolvency Practitioner saying has it that there is no point in putting enough fuel in your plane to fly halfway across the Atlantic). If you do not do both you may simply be sending good money after bad.

Raising cash from third parties

Funds coming into the business from outside will be in one of three forms, grants, equity or loans (or debt).

Grants can be difficult and time consuming to try to access, tend to have been designed to provide part funding for a business investment exercise and therefore have not generally been of particular relevance to the early stages of turnarounds, although they may be more appropriate for the regrowth phase. However in the current economic climate some funding criteria are changing to help support sustainable businesses which can involve turnaround situations. Specialist advisors can undertake a search and can advise you what grants (or other publically funded business support which can include ‘soft’ loans or some equity) you may be eligible for in your area, as well as providing support in applying for and securing funding.

Obtaining funding by way of an equity investment in the business’s shares is relatively rare. While some venture capital (‘VC’) funds do specialise in this area they tend to look at large situations. There are a limited number of business angels (think Dragon’s Den) who will look at investing in distressed situations who may be reached through specialist networks but they will want a substantial share of the business in return for their investment and achieving the right chemistry can be a challenge. Another source can sometimes be a key supplier so it can be worth exploring whether any might consider a debt for equity swap.

The most usual source of new business finance for a turnaround is therefore loans or debt. This can come from your existing bankers who will normally, whatever it feels like, be keen to support you and retain you as a customer, so long as you present them with a credible plan which does not expect them to increase their level of risk beyond what is acceptable. Having experienced turnaround consultants help with drawing up and presenting your plan can help here. It might also come from the government, either directly through the Redundancy Fund which can provide loans to cover redundancy costs, or indirectly through the Enterprise Finance Guarantee Scheme. This is supposed to help by providing a partial guarantee for business loans where lenders feel there is inadequate security, but as the lender is still taking some risk the proposal still has to be seen as viable and few such loans are made in turnaround situations.

But the most common source of turnaround funding is through the use of asset based lending such as factoring, invoice discounting, stock finance, and plant and machinery or property sale and leasebacks. The funding available from these sources where the lender’s principal concern is the value of the security available can often be substantially higher than that available from mainstream banking but it can be a complex market so to obtain the best deal for you and your business you should use an appropriate business loan broker to find you the appropriate funding package.

CLICK HERE for our short video briefing on the Basics of Business Borrowing.

Of course the information contained in an article like this can never be a full statement of the legal position as the relevant laws are complex and liable to change. This article can only therefore be a general guide as to the issues involved and you should always seek appropriate professional advice on your own particular circumstances before taking any action.