Funding a Business Turnaround 1: The Dual Funding Requirements
A business turnaround usually starts with a cash flow crisis and so financing a business rescue therefore usually involves firstly managing the business’s real cash flow so as to deal with the initial cash flow forecast problems so as to survive and stabilise the business; and then refinancing to fund the regrowth and future trading of the business.
At both points in a turnaround, lenders’ confidence in both the business’s management and its ability to meet repayments of borrowings out of future forecasts of cashflows are likely to be low given the business’s current situation or recent history.
Finance for a turnaround usually therefore relies heavily on:
- whatever funds you can generate from within the business;
- together with asset based lending from sources whose lending is essentially based simply on the value of the security available, at its most extreme on pawn broking basis.
The focus of this series of articles will therefore be on how to survive an immediate cash crisis. The type of funding you will need to raised to finance the business’s future development will depend very much on the nature of the business and your plans for it.
Wealth Warning
You must not simply use the techniques outlined in this section to obtain more cash, particularly by increasing borrowings or taking further credit simply in order to stave off an inevitable collapse. You should seek to raise money to support a business in difficulties only if you have a real plan for turning it around which will involve making major changes in how it is operating.
If you simply put more money into a business without making such changes, or insufficient money to see the changes through, all you will be doing is simply sending good money after bad as the business will burn through the new cash introduced. But in doing so you may have actually worsened your position in that you may have:
- converted your personal assets, such as funds in your pension scheme, into cash to put into the business which is then lost;
- had to agree to provide personal guarantees for new company borrowings; and/or
- become personally liable for the business’s debts as a result of wrongful trading which is essentially where you took credit from suppliers and carried on trading after the point when you knew or ought to have known that there was no reasonable prospect of avoiding failure.
The purpose of this article is to help you to weather a cash crisis in order to put a turnaround plan, with some reasonable chance of success, into place. If your business is in a cash crisis and you have (or it would be reasonable to have) any concerns about whether there is a reasonable prospect of the business surviving, it is critical that you take appropriate professional advice so as to protect your personal position.
Three Key Questions In a Cash Flow Crisis
The key questions in a cash flow crisis are:
1 Is the company insolvent? Because if it is, whilst you do not necessarily have to cease trading, there are potential implications and risks of personal liability for the directors (which includes defacto and shadow directors) that can arise out of your legal duties on which you need to obtain advice.
2 Does the company have sufficient funding to meet its needs for the immediate/foreseeable future? If not, you have just answered the first question.
3 Will the lenders continue to support you? This usually determines what the the answer to the second question is.
Each of these issues will be examined in turn in the following articles in thsi series.