Capital is the ultimate scarce resource for companies looking to expand and invest in new facilities or equipment. But for struggling businesses who are trying to make ends meet, what they need is cash.
When cash is tight and the owner or parent company cannot be relied upon for an injection of funds, companies must look elsewhere. In this piece, we are going to highlight some of the more obscure sources of finances beyond the obvious business financing tool: a secured business loan.
Invoice factoring is the wholesale outsourcing of a business’s credit control and debt collection team to a third-party invoice factoring company.
If a business raises a sales invoice for £100, an invoice factoring service will purchase that sales invoice for a percentage of its face value, for example; £90. This will happen with immediate effect and cash settlement will occur promptly.
This way, a company will shorten its cash flow cycle and find itself more flush with cash and may now be able to pay its suppliers on time and avoid insolvency.
As well as quicker access to cash, the business will no longer need to employ accounts receivable clerks to chase the debt and receive payment, because the details on the sales invoice will instruct the customer to pay the invoice factoring firm directly. The recoverability of the debt is no longer the business’s problem.
With invoice discounting, the finance company agrees to advance a sum of money to you against the outstanding value of your trade receivables (unpaid customer invoices). Using historical information and credit reports, an invoice discounter will assess the risk of your uncollected customer debt and treat this as a form of security.
In principle, they are happy to extend credit to you for a percentage of these debts because the underlying receivables should convert to cash within a month or two, providing the business with the immediate means to repay the invoice discounting firm.
Revolving credit facilities
A revolving credit facility (RCF) is an unsecured business loan made by one or more banks at a time. Larger companies may tap into a revolving credit facility underwritten by 2-3 different banks, which helps the banks spread the risk and offer more competitive interest rates on the facility.
A facility may be arranged but not actually used. Businesses may treat it like an ‘insurance policy’ that could help them remain solvent in some unknown future crisis. The administration fees of setting up and retaining the facility will not be insignificant, but this is a price many companies are happy to pay to secure an additional source of cash they can use in emergencies.
Convertible debt is a type of debt security issued by a company, either through public bond markets or privately, that contains special terms and conditions that could be attractive to bondholders.
Whereas a traditional bond contains only a promise to repay a lump sum and interest on the borrowed amount, a convertible bond may give the right to the bondholder to convert the instrument into shares in the company at a date in the future.
Some convertibles place the decision in the hands of the bondholder. This may allow high-growth businesses to raise low-interest debt because bondholders will be tempted by the prospect of future equity returns (which don’t require cash to be paid out by the business).
Other convertibles leave the conversion decision to management. This is a defensive form of debt that effectively allows a company in distress to force bondholders to take greater risk and remove them from the creditor’s list when cash demands become insurmountable.
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