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 nevertheless been a challenging year for businesses. Inflation remains stubbornly high, rising mortgage rates have reduced disposable income for many consumers, and ongoing supply chain disruption, soaring energy costs and geopolitical uncertainty are all putting pressure on businesses.

As a result, many UK companies are beginning to experience cash-flow challenges. Some businesses are already feeling the impact, while others can forecast a capital shortfall or liquidity issue before the end of the year.

So, if a company is facing cash-flow challenges, how can corporate lending facilities help raise the liquidity it needs?

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

• Even if a company is experiencing cash-flow challenges, raising finance may still be possible, provided the business is not in a critical position, such as facing insolvency. Moving early to raise finance before the situation becomes more serious is often essential.
• More than one type of corporate debt facility may be available to a business looking to address a short-term cash-flow challenge. The most suitable option will depend on the company, the sector it operates in, its income structure, the products or services it provides, the severity and expected duration of the cash-flow issue and its overall financial position.
• It may be possible to access several facilities that can be used for different purposes or projects, helping to support liquidity directly or indirectly.
• Raising debt to solve a short-term cash-flow issue without considering the repayment plan, structure or suitability of the facility can simply create another challenge further down the line. The aim should be to arrange finance that addresses the immediate requirement while remaining suitable and manageable for the business over the longer term.
• Depending on the circumstances, a business may not need to rely solely on traditional capital-and-interest repayment terms. Interest-only, partially interest-only and revolving facilities may also be available.
• Finance can sometimes be available even where a company has low cash flow or is approaching a capital crunch, provided the business remains viable. Depending on the assets available as collateral and any additional guarantees that can be provided, Enness may be able to broker finance in situations where liquidity is under pressure.

Working Capital Loans

Working capital loans are among the most commonly used facilities to help businesses manage short-term cash-flow issues. These loans allow a company to borrow capital to support day-to-day operational costs, with the loan and interest repaid over an agreed period.

Where a business is experiencing cash-flow challenges, working capital loans are often secured against company assets. However, unsecured working capital finance may also be available in some circumstances.

Other Facilities To Consider

While working capital loans can provide a straightforward solution where a business needs additional liquidity to cover operational costs, other facilities may also be available. Depending on the circumstances, a different type of finance may be more practical or better suited to the company's requirements.

The options available will depend on factors including the sector the business operates in, the amount of finance required, its financial position and long-term outlook, and the assets or collateral available to support the borrowing.

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

Stock Loans

If a business holds a significant amount of stock, this may be used as collateral for a loan that provides liquidity to support a working capital shortfall. Stock finance may be possible even where a business holds niche or specialist inventory.

The key consideration is whether there is sufficient ongoing market demand for the products being used as security. Stock that is unlikely to sell or has little market value is unlikely to provide suitable collateral for a lending facility.

Invoice Finance

Businesses may also be able to use debtor invoices or receivables as collateral for finance, effectively raising capital against issued but unpaid invoices. This can allow a company to access liquidity to support working capital requirements or manage a revenue shortfall.

Invoice-based finance generally involves a lender advancing a percentage of the value of eligible outstanding invoices. This can be particularly useful for companies operating in sectors with longer payment cycles. For suitable businesses, these facilities can sometimes be arranged relatively quickly, making them a potential option where there is an immediate requirement for liquidity.

Business Bridging Loans

In the current environment, some businesses may experience short-term cash-flow challenges while remaining financially strong overall, with continued market demand for their products or services and an established customer base.

Business bridging loans can be secured against company-owned assets. Property is the most common form of collateral, although other assets, such as infrastructure or machinery, may also be considered in certain circumstances.

Business bridging finance may be used to address a working capital shortfall where the company can demonstrate a credible future liquidity event that will enable the loan to be repaid. This could include the sale of an asset or part of the business, increased liquidity generated by new clients, long-term refinancing or the expected accrual of funds from normal business activities.

VAT Finance

In some cases, a business may face a substantial VAT liability that places pressure on working capital and day-to-day operations. VAT finance may be an option where the company is otherwise in good financial standing, but the timing or size of its VAT liability is creating a temporary cash-flow challenge.

A lender may pay the VAT liability directly to HMRC, with the business then repaying the loan, together with any applicable interest and fees, through agreed instalments. In some circumstances, repayment may instead be structured around a VAT refund due from HMRC.