Buying a distressed business comes with its challenges but can also provide some unmissable opportunities for those able to spot a good deal. When it comes to funding the purchase of a business in administration, however, you will need to consider your options carefully.
Using your own cash to fund the acquisition is, perhaps, the ideal scenario. It’s not always possible though, and other sources of funding are available.
Funding an acquisition
You may assume that a bank loan would be out of reach for those looking to buy a distressed business. It’s true that banks are extremely cautious about funding the purchase of failing businesses, and understandably so. However, all is not lost.
Why not consider:
Offering your assets as security
In the right situation, a purchaser might be able to obtain a bank loan for a distressed business purchase by offering their existing assets as security. This doesn’t come without its risks of course. If you secure the loan against a property, for example, you stand to lose that property if you fail to turn the failing business around or sell it on as a going concern.
Asset-based lending is a go-to solution for those purchasing a distressed business as it involves securing the loan against the tangible assets held within the target business. These could be sold off quickly to pay the bank back if necessary, so the bank is happy.
Using due diligence to convince the bank
Buying a struggling business doesn’t often leave you much time for a thorough due diligence process. However, if the due diligence you do undertake convinces you that the target business is a great deal and can be turned around quickly, the bank will probably see it that way too.
Approaching the bank to which the target owes money
This is a sneaky but effective way to raise the cash you need from a bank. The bank that is currently owed cash by the distressed business you want to buy is far more likely to help finance your turnaround project that an unrelated bank.
Alternative sources of lending
If you’re not having much luck at the bank, why not consider an alternative source of lending. Peer to peer lending, crowdfunding and private investment solutions are all options for those looking to buy a distressed business out of administration.
You will need to be able to demonstrate how the turnaround will look and how you will make a success of the business. Providing evidence of why the business failed in its existing form is also useful. Once again, if you are convinced that you’ve found a great deal and a winning opportunity, someone else is likely to agree.
Finding funding for a business purchase is often challenging and is likely to be even more difficult when the business you are buying is failing. However, you can often secure lending by keeping an open mind about your options and consider using a variety of funding solutions to raise the cash you need.
Funding a turnaround
As well as obtaining the right funding for your takeover, you need to factor in the cost of actually turning the business around. It is a fatal mistake to fail to factor in the working capital you will need to keep the business going and return it to profitability. You will be glad to hear there are a number of specialist lenders that can provide funding that can help.
Let’s look at some of the options you can consider:
This type of lending frees up the cash you have tied up in unpaid invoices. When a company is struggling, it may also experience cashflow problems caused by late or non-payment of invoices. An invoice financier will buy up these invoices from you and often chase up the debts themselves. They will hand over the invoice value to you up front but will keep a percentage of the total invoice value as their fee.
In September 2018, new laws were put forward by the UK Government to help prevent larger businesses from imposing restrictions on SMEs, which prevent them from making use of invoice financing. The National Chairman of the Federation of Small Businesses, Mike Cherry, welcomed the news, stating: ‘’The UK’s £1bn late-payment crisis sends thousands of firms to the wall every year. It needs to end’’
Private equity investment
A common source of funding for turnaround projects is private equity. Investment firms are set up by private investors who want to provide funding to projects that can make them a healthy profit. They may want a percentage of equity in your business in exchange for their cash injection, but they can make a huge difference to your ability to succeed in your turnaround project.
There are a growing number of businesses that are neither banks nor private equity providers, but who specialise in providing business finance. Many will offer a range of solutions and some offer both secured and unsecured lending, depending on your requirements and circumstances. These lenders are worth approaching if you’re looking for cash to help turn a business around after buying it out of administration.
Nucleus Commercial Finance, for example, recently agreed to lend a London-based law firm some £1.05 million to enable them to survive a crisis that could have seen them collapse. The law firm, that was operating as an LLP, had debt with a hedge fund managed by Promontoria. The lender suddenly hit them with a demand for repayment, which they could not afford. Instead of going under, they obtained a business loan with Nucleus, secured with a debenture over the LLP. It was also secured against property owned by a designated member.
So you see, there are almost always solutions to funding requirements – even when businesses are in dire straits. Not everyone that embarks on a turnaround project has the deep pockets needed to fund the entire process themselves. Thankfully, there are plenty of individuals, organisations and businesses out there who will want to share in your success.