Financing a Turnaround

In any turnaround situation, additional finance will be required to help you to achieve your goals.

Whatever route you choose to achieve this finance, it's always worth establishing at the outset what led the business to be distressed in the first place. The usual culprits are under capitalisation, a lack of working capital, loss of confidence amongst stakeholders, poor management and a lack of direction. If you are going to succeed in turning the business around you have to address each specific problem in its own right. In most cases, additional finance will be required or the business will continue to struggle and eventually fail.

Equity finance, can offer you the breathing space to stand back from the business and assess what's going wrong, and how this can be put right. It can buy you time to make these decisions, and timing is always critical in
turnaround situations. Although, generally this is not a speedy process, particularly if it is a third party investment.
However, whilst many directors will consider the equity finance route, less will be aware of the potential role that factors, and asset-based lenders can play in supporting a business that is in a turnaround situation.

The good thing about this option, is that cash flow will be maximised, and in most cases, you will not need to give up any equity. Most players in the print sector are aware of the benefits of receivables finance, (factoring and invoice discounting) but Asset Based Lending (ABL) - is less understood.

It works on the same premise as receivables finance, but the assets financed extend to property, inventory and plant and machinery. Most managing directors and finance directors adhere to the belief that by utilising different financiers for each specific requirement, they will obtain the best deal for their business. There is a strong argument to suggest that this certainly used to be the case, but this does not necessarily hold true now. Not only will ABL providers usually raise more funds in one overall package, it's often the case that this route can be more cost-effective.

What's particularly good about the ABL sector, is that these providers are always looking at new and innovative ways to raise finance for businesses. Some of the providers have already started lending against future earnings of a company, (cash flow loans) in an effort to compete with equity houses.

Management teams looking to revitalise their business would be well advised to consider this type of finance. Not only will the ABL providers have the finance that is required, they will also have the experience of assisting other businesses that have been in a turnaround situation. This is almost as important as the finance itself. The experience gained from assisting others can prevent the same mistakes being made.

Gone are the days when Factoring was used as a ‘Last resort' by the banks for failing businesses. Receivables finance and ABL are now the products of choice, used by companies looking to maximise their cash flow. In fact, in the current climate, around 40 percent of SME's already make use of ABL facilities at some stage of their business cycle. This is a huge jump from around 15 percent 10 years ago, in the days when SMEs favoured overdrafts and term loan funding. In this regard, businesses in a turnaround situation will be all too aware of the old adage that ‘Cash is King.'

If you are interested to know more about how ABL facilities could help your business please contact us on telephone: 020 7487 7240.

Common reasons for business failure;

Bad Debts
A common cause of failure, managing debtors takes skill and experience. Remember to research your customers, be swift to chase debtors, ensure invoices are sent out on time and be clear about payment times.

Under Capitalisation
Underperforming businesses often suffer from a lack of investment. Or, it could be that the investment has been ploughed into the business, but there has been poor performance since this time, which has diminished those funds.

Stakeholder confidence
Underperforming businesses quickly lose the confidence of key stakeholders, such as bankers, customers, suppliers and employees.

Poor management
Probably the biggest cause of failing businesses - we see this affecting a whole range of businesses. Often managers will not face up to, or be unaware that a problem exists, or that positive actions are required to address these issues. Remember that when businesses are incurring ongoing losses, taking quick action is critical.