Funding A Business Turnaround 1: The Dual Funding Requirements

Business turnarounds usually involve an initial cash flow crisis and so funding a turnaround therefore usually involves firstly managing the business's finances so as to deal with the cash flow forecast problems and survive to stabilise the business; before then refinancing to fund the regrowth and future trading of the business.

At both points in a turnaround however, lenders' confidence in both the business's management and its ability to meet repayments of borrowings out of future forecasts of cashflows, are often at a low ebb, given the business's current situation or recent history.

Finance for a turnaround usually therefore relies heavily on:

- whatever funding can be generated from inside the business;

- together with asset based lending from sources whose principal concern is the value of the security available, at its most extreme on pawn broking basis.

The focus of this series of articles will therefore be on how to survive an immediate cash crisis. The type of funding you will require to suppoort your business's future development will depend very much on the nature of the business and your plans for it.

Wealth Warning

You must not simply use the techniques outlined in this section to obtain more cash, particularly by increasing borrowings or taking further credit simply in order to stave off an inevitable collapse. You should seek to raise money to support a business in difficulties only if you have a real plan for turning it around which will involve making major changes in how it is operating.

If a business owner simply puts more money into a business without making such changes, or puts insufficient money in to see the changes through, all they will have done is simply to have sent good money after bad as the business will simply fail once it has burnt through the new cash introduced. But in doing so you may well in fact have worsened your personal position in that you may have:

- converted your own assets, such as money held in a pension scheme into cash to invest into the business which is then lost;

- had to agree to provide personal guarantees for new company borrowings; and/or

- become personally liable for the business's debts as a result of wrongful trading which is essentially where you took credit from suppliers and carried on trading after the point when you knew or ought to have known that there was no reasonable prospect of avoiding failure.

The purpose of this article is to help you to weather a cash crisis in order to put a turnaround plan, with some reasonable chance of success, into place. If your business is in a cash crisis and you have (or it would be reasonable to have) any concerns about whether there is a reasonable prospect of the business surviving, it is critical that you take appropriate professional advice so as to protect your personal position.

Three Key Questions In a Cash Flow Crisis

The key questions in a cash flow crisis are:

1 Is the company insolvent? Because if it is, whilst you do not necessarily have to cease trading, there are potential implications and risks of personal liability for the directors (which includes defacto and shadow directors) that can arise out of your legal duties on which you need to obtain advice.

2 Does the company have sufficient funding to meet its needs for the immediate/foreseeable future? If not, you have just answered the first question.

3 Will your bankers or otehr lenders continue to support the business? This may well determine the answer to the second question.

The next article in this series will examine each of these issues in turn.