Finance, What Finance? Debt Funding Options for Your Business
The new economy suggests that if traditional debt funding sources are available, they are in very economical amounts, if indeed at all!
Woe betide anyone whose business has gone out of favour with the financial markets, i.e. retail, construction and recruitment, and if you are displaying even the slimmest of declines in your performance, then prepare yourself for a fight to keep what you have, never mind acquiring further cash.
All the UK high street main lenders have rolled up their shutters to new lends, except for the historically conservative Co-Op and Clydesdale (Yorkshire) Banks, who are taking on some new business, albeit with tough covenants and high interest rates.
Where any lend is being considered, protracted timescales are the norm, as credit committees cover their backs - and the rest! Due diligence is more thorough than ever, with even seemingly robust deals being aborted at the last moment.
The new economy, therefore, requires new, fresh thinking for an entrepreneur to maximise available cash.
Consider first what you have, asset wise, and how you may exploit it further. Take your Debtor book for instance; is it worth looking at early settlement discounts or pro-forma deals? Tough credit control, needless to say, is paramount.
Stock – have you looked at your stock levels? Can you sell some to release cash? Would your supplier provide consignment stock or, at worst, free stock to be paid for only when sold?
Creditors – Not just trade, are there deals to be done on payment extensions? Don’t forget, even if they charge higher than bank interest rates, this is unsecured lending.
Assets – Can you sell them and lease back your fixtures and fittings, plant and equipment and motor vehicles? There are specialist funders for these type of deals.
Create cash – By offering staff a pension holiday or even forsaking contribution payments for a period until business picks up. For most people this is far more attractive than salary cuts. Some enlightened businesses have introduced a barter system on their goods and services though check out the tax implications.
So, now what, if you have milked all your own assets, still need cash and the banks and debt are a no-no?
Invoice discounting and factoring, if applicable to your business, is certainly worthy of a serious look and works well provided turnover is good and growing, not dependant on a few key customers and does not have lots of international trade. But watch for the small print, negotiate hard on the arrangement fees and the admin costs, these are much more onerous than the interest.
Also consider the exit provisions both in terms of costs and timings. There is a distinct likelihood that the less than savvy entrepreneur may be so thrilled to get the funding that they don’t consider these issues and then find they are locked in an agreement that is ineffectual and expensive to exit.
2013 is going to be difficult for most businesses – those that survived the last 18 months have done so often due to the sacrifices made by their owners; the homes they have pledged and the salaries they have cut. If this year requires severe remedial action, many of these companies have no more resources to access and, as such, will fail. Not because they don’t have business but primarily because they have the trade but they can’t service the debt attached.
So my motto: “spend less, save more in 2013 – you will need it to survive 2014”
Jo Haigh is a partner in fds Corporate Finance Services, with bases in London, Birmingham and Yorkshire, and a partner in the fds Group, a specialist training and development business. An experienced dealmaker, Jo specialises in putting together the right deal at the right time and in the right format for growing businesses throughout the country. She has bought and sold over 300 companies in the last 20 years specialising in owner managed companies. She is a regular presenter for the Institute of Directors on corporate governance and mergers and acquisitions.
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