Should I take out a loan to save my business?
According to the most recent figures from The Insolvency Service, the number of UK business insolvencies has grown 20% in the past three years with 17,439 businesses becoming insolvent in 2018, a rise of 122 from the previous year.
Most kinds of insolvency procedures saw increases for this period including Company Voluntary Arrangements (CVAs) which allow companies time to avoid administration, restructure and hopefully return to profitability.
While some of these companies will have had fundamental issues which would have meant their closure was unavoidable, many others may have just been suffering from temporary liquidity or cash flow shortages. If they had been able to access extra funds at the right moment, it could have made all the difference. Or could it?
There are several common warning signs that indicate if a business is approaching a financial crisis:
- Constantly operating at the limits of a business overdraft facility or other business credit lines or accounts
- Receiving or ignoring calls from court enforcement officers
- Receiving statutory demands for payment
- Having to renegotiate credit or payment terms with suppliers and creditors
- Not paying bills on time
- Falling behind on staff wages or payments to HMRC
- Using personal finance sources to support the business – credit cards, savings, loans or overdrafts
- Inefficient or incomplete financial information – you have no way of quickly getting a broader picture of your business’ health
There’s a first time for everything and if any of these eventualities happen and you deal with them quickly and properly then this is decisive management. If they keep cropping up, you ignore them or they happen so often as to become part of the usual business cycle then that is indicative of a larger problem.
Obtaining finance might also raise bigger issues. Banks and other lenders will require more in-depth, detailed information and security which would add them to the list of creditors in the event of business failure.
While it might be easier to obtain personal finance at this point such as a loan or a credit card, they may also require additional security and as information is shared between financial providers and credit referencing agencies then any discrepancies or other warning signs will be triggered and shared between every provider.
Press pause before pressing go
Before taking out a personal loan or additional business loans requiring personal guarantees to try and keep you business going, it may be time to stop and think:
- What will change moving forward?
- Was it a one off event that has you in the current situation or are there material changes moving forward?
- Is the cash enough to turn the business around?
Before obtaining the finance there are two steps you should take:
- Prepare realistic and prudent forecasts for the business trading forward, based on a worst case scenario.
- Obtain professional advice.
If you recognise any of these signs or you feel the downturn or slump your business is experiencing has become ingrained and permanent then you should speak to one of our team of experts who can give you an impartial view about what you can do to save your business.
If you take out the finance without taking advice, not only could this increase the losses to creditors, you could also find you have shifted a number of liabilities on to yourself through personal guarantees, only to keep the business running for another six months.
Sometimes a business can’t be saved and in such circumstances we can help you plot the most realistic strategy through administration, if necessary, and beyond.