Monday, April 23, 2018

Financing Stressed Businesses

CEO's of stressed businesses believe that by borrowing more money from lenders they can potentially solve the company's financial problems. More often than not, a shortage of capital is just the symptom and not the underlying problem. It is important to investigate issues as soon as possible to minimise the negative impacts through decline or to prevent bankruptcy.

There are many problematic areas worth investigating if you feel the business isn't doing too well. Today most companies often look towards business efficiency but lose sight of the two things that gives the business it's income, Customers and the Product.

Value of the Product.

Sometimes in order to maximise efficiency, a new supplier may be targeted which can lead to a change in the quality of the product.

Customer Retention. 

Keeping customers updated and engaged on a regular basis. Problems happen when there is lack of focus in “after sales” e.g. follow up and communication. It takes 90% less effort to retain a customer than it does to find one. Value your customers, they are THE key to ongoing business.

One key area where businesses have lost business due to automation is through telephone switchboards. For example; Most people are eager to talk to customer services personnel to discuss their issues rather than face 5 mins logged in queues or dialling menus on a telephone pad to the right department.

Other problems may be that the company has grown too fast, if a business owner decides to open another shop in a different location it is imperative that they do full research into the pros and cons of doing so. For doing so based on a hunch could mean a lot of expenditure and outlay for very little return.

The third most important issue is filing of business accounts. It's best to hire a qualified CPA to file your accounts and record keeping.

Financing Stressed Businesses

Business owners can find solutions to alleviate financial stress through different methodologies. Financing strategies differ depending on the liquidity and viability of the distressed business. It may be necessary to raise capital in order to generate more cash flow, a successful turnaround must first resolve the problems that produced the cash crisis in the first place.

It's common for these businesses to approach Asset based lenders to be the primary choice when it comes to sourcing finance. These loans are based on LTV on assets, generally accounts receivable and inventory that are used as collateral. These types of loans are designed to access the liquidity locked in your assets but if the loan has not been repaid then the assets are taken. The advantage of equity funding is that funds are provided without interest cost and thus enhance cash flow. Very often the company would have to give up an equity stake within the company to the private equity funder.

It could be worthwhile meeting up with the local Government representative and see if they are willing to provide any tax concessions in order to save jobs thus a continuation of contributions into the economy for the long run.

When it comes to financing a failing or distressed business, there are three finance options which can be considered:
  • Traditional loan from a bank which carries extra debt burden.
  • Asset lender finance to extract liquidity in company assets, or/li>
  • The Non conventional route that could consider purchasing or leasing an SBLC.
Bear in mind, if you need a third party to come in and provide some business advice it might be obvious that some business consultants work with CEO's in or on the edge of bankruptcy. Other consultants concentrate only on those who are fortunate enough to seek help early on before the crisis is out of control. It might be necessary to consult with a lawyer/accountant or financial advisor before taking on such services.