It's not just small businesses and SMEs that need business rescue loans to get themselves out of a pickle, it happens to large corporations as well. It also happens to financial entities a whole lot bigger too.
Take the case of Italian bank Veneto Banca, it recently needed over €17 billion euros in order to avoid closure and risk even more euros being sacrificed via Italian fiscal policy.
Worse still was the Greek crisis, which lead Germany, France and Italy to lend over €360 billion via the IMF, European Central Bank and the European Commission. And still that hasn't worked (or ever was going to work).
So having unenviable finances, or a business strategy that isn't working, doesn't just apply to businesses that find themselves on the wrong side of economic terms. Whether it's being on the wrong side of the pound when imports outweigh exports, or when incoming receivables are outweighed by supplier invoices. Every business has the potential to find themselves on the wrong side of the finance equation, so what are your options?
Bad Credit? It Doesn't Always Delete Your Options
Getting finance when your business doesn't have the best credit history/rating isn't going to be easy. If you are lucky enough to have a strong trading history and can demonstrate how you'll avoid further debt then you will have more chance of securing business finance. This is even more likely if you can do this as well show you are in a position to increase your bottom line.
However bad credit can affect your ability to borrow in three ways:
1. Whether you get your loan approved
If your credit score is too low then you might not get your loan approved. The lender wants proof that if they lend you the money then they will get it back. Your credit score gives lenders an indication of whether or not you are trustworthy. Sometimes, your credit score has very little to do with how well your business is performing and the potential revenue that can be added when investment is offered.
2. How much loan is offered
With a poor credit score the lender might not offer the amount you have requested, which can be frustrating if your business has potential revenue streams that can only be accessed by receiving full funding.
3. Loan repayment terms
Unfortunately the lower your credit score is, the higher your interest rate is likely to be. Which means you'll be offered interest rates which aren't as attractive as market rate. It can mean the difference of paying back thousands or tens of thousand of extra pounds back over the lifetime of the loan.
Situations When Considering Business Rescue Loans Is Vital
While having bad credit has its limitations, any business can get in the position where meeting liabilities is forefront. Paying off debt and consolidating finance need dealing with before you can invest, scale and put into practice medium and long-term goals.
If you happen to already be at the end of your tether and have experienced, or are about to experience any of the below list, then finance is not going to be straightforward.
Bailiffs - These are usually called in when a court order has been issued after a bad or prolonged debt, although not needed if you owe tax. Bailiffs can take an inventory of your goods or seize them if necessary. They prefer to take payment on the spot though.
CCJs - A County Court Judgment (CCJ) is a type of court order - that can be registered against you if you fail to repay money you owe.
IVAs - An individual voluntary arrangement (IVA) is a formal agreement to repay creditors at an affordable amount, without having to resort to liquidation or bankruptcy. Each month one lump sum is paid which is distributed fairly amongst your creditors. These arrangements can last for up to five years.
Your Financial Options
So what can you do? There are a number of finance options on the market for businesses in your position. When it comes to business rescue loans you will probably already have looked into the other two options available to you:
- Taking out a Director's Loan
Is liquidation the answer for your business?
Liquidation is a formal insolvency procedure where the legal status of a company is ended. All of its assets are liquidated and the proceeds of which are used to repay creditors.
Liquidation comes at a cost, not just the financial costs of bringing in the insolvency solicitors, but also the very real prospect of being in some way financially liable as well. Liquidation comes with:
- Additional expenses
- Loss of your brand
- The possibility of a post-liquidation investigation
- Being held personally liable.
Using a director's loan
The golden rule of using a director’s loans is that the company is a separate legal entity to the director. Any money that is earned by the company belongs to the company. Because of this distinction, directors should look to offer only short-term loans.
If your company then enters insolvency, the directors might well be required to repay any outstanding loans personally, so it's worth weighing up the level of responsibility when considering lending money to your business.
Business Rescue Loans: Not Always A Last Resort!
Gaining finance at a stage in your business when your backs are already against the wall is as much attempting to protect the core of your business as it is negotiating and dealing with any financial difficulties that have arisen.
However it might also be the case that business rescue doesn't have anything to do with potential liquidation, or a buildup of debt responsibility. It might well be that your business has stagnated, relying on existing customers without seeking out new, or bigger ones, and failing to replace customers that churn.
Business rescue loans might well seek to 'shake things up a bit' and provide financial capital in order to re-energise the business, through either new product lines or investment in technology.
Who Can Benefit From Business Rescue Finance?
A business doesn't have to be on the brink of going under to take advantage of business rescue loans. Finance can be found to help any business that might be in one of the following situations:
- Any business experiencing cash flow problems
- A business looking for equity investment
- A company looking to replace a shareholder or Director who is leaving and taking their investment with them
- Companies with a buildup of debt to HMRC
- Seasonal businesses needing to stock-up for their sales cycles
- Companies looking to restructure their debt
- Any business that has received CCJs or winding up orders
- A business with a healthy sales order book, but under pressure from suppliers.
The five main reasons for getting a business rescue loan remain the same reasons almost any other business looks to get finance.
Cash flow - A business will always fail if it doesn't have sufficient cash flow. Most business failures in the UK can be explained by poor cash flow. Business rescue loans can prove life-saving for companies with strong order books, but poor cash flow.
Expansion - As a business grows so does the level of technological investment required to stay apace with consumer demand, market conditions and competitors. Finding the finance required to invest in equipment, new premises or new technology can be difficult without either cash flow or existing company assets.
Staff - Taking on new staff is a big outlay for most businesses, especially those that are expanding rapidly. The usual process involves hiring and spending on personnel before the expected increases in revenue arrives.
Stock - Having an inventory capable of servicing your customer-base means investing in a lot of stock, which may or may not get used immediately. This can use up extensive funds and cause a disparity where debts amount quicker than credits.
Machinery - Staying ahead of your competition means using the best machinery. This can either increase production capacity, reduce staff numbers or make a better product. But who has £50,000 in spare cash lying around?
On the face of it there doesn't seem to be anything different between the reasons for getting a standard business loan and getting a business rescue loan.
The one real difference is the level of bad credit one might have over the other. That bad credit might deny earlier funding and push businesses closer to the edge than a comparable business with good credit, thereby mitigating the need for business rescue loans as opposed to standard business loans.
Don't Lose Sight of Your Core Business
We are acutely aware of any financial problems you might face,whether this is lack of sleep or panic-induced worry for your business.
One of the big reasons people get into debt is that they lose sight of what it was like when they started their business. When they started their business the core of it was successful and as they progressed and grew it’s easy to lose sight of that core.
Whatever your position with creditors, with a bit of breathing space your business can find that core again and thrive. Access Commercial Financial looks to do just that.
One of the main restrictions you are likely to encounter when looking to access finance in the form of a business rescue loan is your own financial track record. The worse your financial position and credit history, the more difficult it will be to secure business funding when you are being squeezed.
But that won't dictate the final outcome. It is your overall business strategy, customer database and financial projections that matter more. Short-term financial pressures affect everyone, but not every business has a sound business plan meeting customer demand with need.
For an impartial view on business rescue loans and for further business advice, contact Access Commercial Finance immediately to see whether you qualify for one of our business rescue loans.