What Corporate Debt Facilities Are Available For Companies Experiencing Cash-Flow Challenges?

The UK looks set to avoid a recession in 2023, but it has been a challenging year for businesses, nevertheless. The much-talked-about inflation rate remains stubbornly high, rising mortgage rates have meant that many people have less disposable income, and ongoing supply chain issues and soaring energy costs - mixed with ongoing geopolitical uncertainty - means that many businesses are starting to feel the pinch.

The result is that many UK businesses are starting to experience cash-flow challenges. Some companies are seeing this already; others can forecast that they will have a capital shortfall or cash-flow challenges before year-end. 

So, if a company is facing cash-flow challenges, how might they be able to utilise corporate lending facilities to raise liquidity that will help them?

 

Corporate Finance For Companies Facing Cash-flow Challenges: What To Know:

• Even if a company is facing cash-flow challenges, raising finance is usually still possible provided they aren’t in a critical position (i.e., facing bankruptcy). However, moving early to raise finance before the situation becomes more serious is essential
• Usually, more than one type of corporate debt facility will be available to a business needing to cover a short-term cash flow challenge, rather than a working capital loan in exclusivity. The facilities a company can choose from will depend on the company and the sector it operates in, its income structure and what it offers clients or customers (i.e., services, products, etc.), the severity and projected length of any cash-flow challenges, the company's overall financial position and so on
• It may be possible to access several facilities that a business can utilise in different ways or to finance various projects or requirements, directly or indirectly covering a cash-flow shortfall
• Solving a short-term cash-flow issue by raising debt but not considering the ideal repayment plan, structure, or facility is often not the quick win it looks like, as a business will solve a current challenge but create a new one later when the loan isn't optimised for the business' situation, is overly-expensive, or repayments aren't ideal for the company in some way. Getting advice and taking out a loan that solves a current cash-flow challenge and is structured so it's optimal for the business over the long term is the ideal course of action
• Depending on the business situation, a company won't necessarily have to opt for traditional capital and interest repayment terms. Interest-only (partial or full) and revolving facilities may also be an option alongside conventional repayment schedules
• Loans can be available even if a company has low cash flow or is about to experience a 'capital crunch', provided the situation isn't critical because the business is about to fail. Depending on the assets that a facility can be collateralised against, and which additional guarantees can be put forward, Enness can usually broker a deal to raise capital even in situations where cash flow is a real challenge

 

Working Capital Loans

Working capital loans are among the most-used facilities to help businesses navigate cash-flow issues. These loans allow a company to borrow a sum of money that can only be used to cover day-to-day and operational costs (hence the term 'working capital loan'), with the loan capital and interest being repaid over a set period. Working capital loans are usually secured against a business' assets when a company is experiencing cash-flow challenges. Still, in some cases, unsecured working capital loans may be available.

 

Other Facilities To Consider

Working capital loans are often the most straightforward solution for raising debt if a business needs a cash injection to cover operational costs, other facilities may be available. In these scenarios, a business can take out a loan using different types of facilities, which may be more practical or convenient. The company can use the capital raised to cover working capital costs. The options available to a business will depend on the industry or sector it operates in, the amount of debt they need to raise, its financial position and long-term outlook and the collateral it can put forward to a lender. 

Other options for raising capital to navigate cash-flow challenges include:

 

Stock Loans

If a business has a significant amount of stock, this can be used as collateral for a loan that provides liquidity to cover a working capital shortfall. Stock loans are usually possible even when a business holds niche or speciality stock. What's essential with stocking loans is that there is ongoing market demand for the products used as security rather than an outright lack of consumer interest that is expected to continue: stock that is unlikely to sell will not make a stocking loan possible, for example.

 

Invoice Finance

Businesses can also use debtor invoices/receivables as collateral for a loan, effectively raising finance against open invoices to access capital and cover working capital requirements or a revenue shortfall. Invoice-based financing works when a lender gives a company a percentage of issued but as-yet unpaid invoices. This is especially useful for companies in sectors with relatively long payment cycles. These loans can usually be completed in just a few days for suitable candidates and, therefore, can be used to cover relatively requirements for liquidity.

 

Business Bridging Loans

In the current environment, many businesses are experiencing short-term cash-flow issues but remain in a strong position overall, with solid market demand for their products/services and a strong customer or client base. Business bridging loans can be secured against company-owned assets: property is the most common type of collateral, but other assets like infrastructure or machinery may be possibilities. Business bridging loans can be used to cover a working capital shortfall. They may be helpful if the company demonstrates a future liquidity event that will allow them to repay the loan. The sale of assets or a part of the business, increased liquidity from new clients, long-term conventional finance or accrual of funds from business activities can all be used to pay off a business bridging loan.

 

VAT Finance

Sometimes, a business will have substantial VAT liabilities, which take away significant working capital from a company's day-to-day operations. Usually, VAT loans are an option if the business is in good financial standing, but the VAT liability is causing the cash-flow challenge based on how much revenue the company has to accrue to cover its VAT bill. A lender will usually pay off the VAT liability to HMRC directly, and the business will reimburse the loan (capital and interest) in monthly instalments. Alternatively, the lender is repaid when the company is refunded by HMRC, minus any fees and interest.