Given the current state of recession that we’re experiencing it will hardly come as a surprise to learn that many businesses – big and small – are experiencing very real financial difficulties. Consumer and business spending has been cut back in recent months both within the domestic economy and on a global basis and many businesses are suffering from extreme problems with cash flow and debt management.
For many business owners their current situation is such that they need to think about restructuring their debt to ‘ring-fence’ it to ease the financial pressures of maintaining it. This would allow many of them to make it easier to repay what they owe and to keep on the financial straight and narrow. This will also put them in a better position to come through the recession successfully in the first place.
Like a consumer, one of the most obvious ways of sorting out a lot of diverse and varied debts is to take out some form of consolidation loan. This kind of loan will be taken out with a view to paying off all existing debt and giving the business one loan to deal with. The aim here is to cut down on monthly repayment commitments to free up more cash and to put the business on a more stable footing.
- Where to go for advice
Before you decide if this is a route you can and should be taking you will need some advice from a qualified business specialist. You can talk to your accountant to find out his/her opinion, your own finance staff if you employ any, the business manager at your bank or an independent business advice specialist.
- Will you qualify for a consolidation loan solution?
Your ability to take out a consolidation loan will depend on the viability of your business and your ability to repay the loan in the first place. A business that appears to have the ability to turn itself around or that is simply experiencing cash flow problems even though it is doing well on paper will most likely be viewed as a viable option here. If your business is not doing well at all and it seems unlikely that you will be able to turn it around or to meet borrowing commitments then you may well be turned down.
This is very much like a consumer looking to take out a personal loan. If you can show that this is a temporary situation and that you can repay what you borrow then you stand a far greater chance of getting the help you need.
- What options do you have?
Businesses have various options when they need to raise finance to consolidate existing debts. Not all of these solutions will be open to all businesses. As already stated this will depend on your business and its current and future circumstances.
In general terms there are two ways of raising finance as a business: debt loans and equity loans. With a debt loan you simply borrow money and then have to pay it back with no other commitments to make. With an equity loan you basically sell equity in your company to raise the money that you need. Options here include:
- Bank finance: you can approach your current bank and ask them for a business loan.
- Venture capitalists/angel investors: these companies and individuals will pump money into businesses to help them refinance and will generally take an equity stake for doing so.
- Government sources: at the moment the government has increased its loans help for UK businesses under the Enterprise Finance Guarantee. This helps businesses who need to raise money but who are finding it hard to do so in the current economic climate. This scheme basically sees the government ‘back’ lending to minimise lender risk, making it easier to get a loan in certain circumstances. You can learn more about this at www.berr.gov.uk.
- What do you need?
You will need to show a robust and in-depth business plan with full financial disclosure to give a snapshot of where you business is and where it is likely to go in the future. In many cases you will also need to offer some form of security to back a consolidation loan. This makes lenders/investors feel more secure about the money that they give to your business and makes them more likely to give it to you. So, for example, you could offer:
- Equity in your business
- Business assets as security
- Personal assets as security
If you do use personal assets to guarantee a loan here then do think hard before doing so. It’s one thing to use your home to guarantee a personal loan for consolidation purposes but it is a completely different ball game to use it for business funding. Here, if your business goes down you could well lose your home as well.
In some cases you may be able to take other options instead of a consolidation loan. In some cases you may have to if you don’t qualify to borrow in the first place. So, for example, if you are having problems servicing your debts because you have cash flow problems even though your business is doing OK then you could look at factoring as an option. This would unblock the cash flow process and give you more of a regular income to service your existing debts.
In some cases businesses will also instead take on a Company Voluntary Arrangement (CVA) to sort out their debts. Like an IVA taken out by an individual this kind of agreement will see you make arrangements with your creditors to repay certain sums on a regular basis over a number of years to clear as much as possible from your borrowings. Again, you should take solid financial advice here before coming to any decision.