In the latest figures from the Insolvency Service, December 2022 saw a 32% rise in the number of business insolvencies in England & Wales compared to the same month in the previous year.
But with the right funding structure in place, could some of these insolvencies have been avoided?
In our third and final article of our recession-proofing series, Head of Commercial Funding Solutions, David Wright, shares his insights.
Over to David…
It’s no secret that some businesses are taking a hit and are at risk due to the current recession. Ensuring that you have the correct funding structure for your business, and making key changes to your overall business plan can ensure its survival through a recession, or even help it thrive.
There are five key areas that I believe business owners should be paying attention to in 2023:
1. Managing the cost of funding
During a slowdown, we normally see interest rates decline to stimulate growth and spending, but continued concerns over inflation have led economists to forecast the Bank of England’s Base Rate to peak at 4.5% by the end of June 2023.
Many businesses will be directly impacted by these increased rates. Existing mortgage payments, unless fixed, will rise, working capital facilities cost more to operate and the cost of financing new assets remains volatile, with some lenders reviewing pricing several times a month.
If you’re raising debt to support cash flow, remember that new debt is not always the answer. Firstly, take time to review your existing funding arrangements. Your aim should be to make existing working capital finance more effective. This could have the benefit of releasing cash back into your business and helping bridge the cash flow gap.
If raising new finance, make sure you shop around. The difference between cheapest and most expensive can be dramatic.
2. A tightening of credit appetite
In uncertain times, funders adopt tighter management of risk and exposure. This could be a reduced appetite in certain sectors, not lending against certain property assets or sometimes looking to reduce the amount of lending against balance sheet assets such as debtors, stock or tangible assets such as plant and machinery.
The management of risk isn’t necessarily uniform across all lenders – what looks good to one lender may not be the right deal for another. You should always shop around to strike the right balance between cost, terms, security and funding generated.
3. Changes in working capital & rising costs squeezing cash flow
As highlighted in our previous recession-proofing articles, the importance of having a clear understanding of how change can affect your working capital cycle will be critical for managing cash flow over the next 12-18 months.
In any economic slowdown, we see customers taking longer to pay and suppliers and sometimes insurers tightening credit terms. In the current climate, this can also be compounded by the increasing value of stock holdings, the result of price rises or bulk buying due to supply chain challenges.
Detailed forecasting will help you review the impact these changes will have on your cash flow. Once you understand this review options to mitigate this risk.
In a downturn, there’s still an appetite for lenders to lend against assets, but it’s important to have a piece of decent information to hand. Ensure that your asset register is current and make sure that your aged debtors and stock reports are accurate. If your aged debtors schedule reports overdue debt, you should tidy it up by focussing on credit control. Not only will it generate cash, it will also make your business more attractive to funders.
Overdrafts were once the working capital facility of choice, and are still available if you can provide bricks and mortar as security. But for most, using balance sheet assets, such as plant and machinery, debtors and stock, will remain the key to unlocking cash flow from your working capital.
When reviewing working capital options, such as Invoice Finance, Overdrafts or Stock Finance make sure you get the balance right. It’s a very competitive market, so shop around. Make sure you’re getting the right amount of funding against the basket of assets.
4. Changes to the unsecured loan market
After the recent surge in lending that has taken place with government support, there’s now a sense of normality returning to the market. However, with the recent base rate rises, the cost of accessing some funders has increased significantly. The ability to ‘bridge the cash flow gap’ or finance growth, through easy to access loan providers may not be as easy or as economic as it once was.
There are still options though. Some European and UK Government backed funds, will remain active and will look to support growth opportunities or help businesses bridge a funding gap. These funders tend to be more selective, and have specific rules as to how their funding can be used. They’ll require forecasts and their lending process may be longer and more detailed than some of the online lenders. The terms available can be really attractive, but the key here is to act early. It’s better to have finance in place and not need it, than require finance and not have it.
5. The increasing cost of capital expenditure
It’s important that businesses continue to invest and grow. This may be through new technology, replacing old assets that are tired or to support growth in to new markets. Whatever the reason, capital expenditure is key to maintaining a competitive edge.
The challenges to supply chains witnessed over the past two years is now being impacted by inflation and increasing financing costs. With inflated asset values funders are paying more attention to the debt service and balance sheet strength of prospective borrowers.
Asset finance remains a very price driven market, but with the rising costs of assets and finance, the need to secure a competitive deal is critical.
If you’re using a broker or intermediary to source finance, ask them about their charges. There’s currently no requirement to outline the commission paid to intermediaries for sourcing asset finance. I often get asked, if I want to take a 3-4% to cover my time. This commission feeds straight into your cost of finance. Our Commercial Funding team only ever charge up to 1% commission, unless agreed otherwise. Whilst using advisors who have an understanding of the funding options can add great value. Make sure you are paying a reasonable cost to obtain this support.
Finally when assessing the business case around new asset purchases, if debt service is tight, you might need to think smarter and restructure some existing debt to make the finance more manageable. Continued investment is important but the key is not to over commit, be honest with your affordability assessment.
Being smarter with asset finance will definitely be a theme of 2023.
We are here to help
DJH Mitten Clarkes’ Commercial Funding Team helps clients optimise existing funding as well as sourcing and structuring new finance.
If you’d like to discuss your business funding please email info@djhmittenclarke.co.uk
