Does your company need cash to pay its creditors and prevent legal pressure from leading it towards liquidation? When your company’s access to cash is limited, it’s surprisingly easy for a small debt to grow into a threat to your company’s solvency.
Companies with cash flow issues and significant liabilities that are still viable may be able to use emergency finance to access cash and ensure creditors are paid on time, preventing action such as a winding up petition.
There are numerous finance options available for companies affected by cash flow issues. These options range from short-term cash loans to asset-based lending and cash flow solutions such as invoice factoring.
If you believe your company can recover from its cash flow issues and can present an effective strategy to lenders, your company may be able to use finance to work through its cash flow issues and move towards a recovery.
Does your company need cash as soon as possible? If you’re interested in borrowing money to pay your company’s creditors and avoid insolvency, read on to learn more about the options that are available.
Emergency finance quick facts:
- A variety of emergency financing options are available if your company has a viable business model and extensive trading history, from cash loans to asset based financing and invoice factoring.
- Since emergency loans are available to struggling companies that are a credit risk for lenders, they typically have a higher interest rate than bank loans and require extensive reporting.
- Not all emergency finance solutions are loans. If your company has assets in the form of accounts receivable, it may be able to borrow against this or get instant cash using invoice factoring and discounting.
- Companies that are seriously distressed and unlikely to recover – insolvent businesses with no cash flow, for example – are unlikely to be able to access emergency finance and should consider other insolvency solutions.
- If your company has a viable strategy for recovering and sufficient cash flow to pay back its loan, emergency finance could help it deal with its short-term cash flow issues and recover.
What is emergency finance?
Emergency finance is, simply put, a loan made out to your business during a serious cash flow emergency. Emergency loans are designed to help your business get past a major cash flow crisis and avoid becoming insolvent.
Companies typically use emergency loans to provide liquidity after a cash flow issue, such as the loss of a customer or major source of revenue, a significant disruption to business or a contingent liability becoming a real cost.
Both unsecured and secured emergency loans are available. Many companies make use of asset-based financing – capital loans backed by assets such as equipment or property – to access cash when cash flow is insufficient or unpredictable.
Although loans are the most widely known form of emergency finance, they aren’t the only option for struggling businesses. Companies in need of cash can also use solutions such as invoice factoring to create the short-term cash flow they need.
What financing options are available for struggling companies?
If your company has a long history of profitable trading, it may be able to access a selection of financing options. These include emergency loans, asset-based finance, invoice factoring and invoice discounting.
Each form of emergency finance has advantages and disadvantages that you should be aware of before considering any option. The most popular and effective forms of emergency finance are listed below:
Emergency Loans
If your company has a long trading history but needs to overcome a cash flow crisis, it may be able to access emergency loans from lenders that understand its needs in its current financial situation.
Emergency loans are short-term loans that are designed to help your company in the event of a serious cash flow crisis that strains your company’s ability to pay its staff, suppliers and creditors.
Since emergency loans are relatively risky for lenders, they typically have a higher interest rate than a standard bank loan. If your company can quickly recover and repay the loan, an emergency loan can be a relatively affordable option.
Emergency loans are suitable for companies that have a history of trading and the ability to recover from a cash flow crisis. Used effectively, an emergency loan can stop your company from becoming insolvent and wound up by its creditors.
Asset-based Finance
Asset-based finance is a form of lending that’s secured by your company’s assets. A loan could, for example, be provided to your business using an asset such as factory equipment as a form of security for the lender.
This type of lending provides more security for lenders then emergency lending and is typically less expensive for your company. Your company may be able to access a greater amount of cash using asset-based financing than with emergency lending.
Asset-based loans aren’t always secured by physical assets. Instead of equipment or property, your company may be able to secure an asset-based loan against its sales ledger or even its existing product inventory.
Invoice Factoring/Discounting
Invoice factoring and discounting are two forms of short-term finance that let your business generate cash flow using its accounts receivable. Instead of waiting to be paid by customers, your company is paid immediately by a third party.
Factoring involves selling your company’s invoices to a factoring company. Your company receives a large share of the invoice (typically 80% of more) right away, followed by the remaining invoice balance once the customer has paid.
The factoring company collects the invoice on your company’s behalf and charges a fee for each invoice. Since your customers pay the factoring company and not your company, they’re aware that you’re using factoring to improve cash flow.
Invoice discounting is a similar procedure that involves borrowing money based on the value of your company’s invoices. Unlike factoring, your company is required to collect customer payments, making discounting a more discrete cash flow solution.
Learn more about invoice factoring
Learn more about invoice discounting
Is your business eligible for emergency loans and financing?
Emergency lending is a risky activity for lenders, and not all companies will be able to access cash via a short-term loan. Lenders typically look for companies that have an effective strategy for improving their finances and a good trading history.
If your company has no way of fixing its current financial issues and simply wants to ‘buy time’ before creditors take action, emergency finance is unlikely to be a helpful solution to its problems, nor is it likely to be available.
However, if your company has a realistic plan for recovery and a history of trading successfully, it may be able to access short-term financing that allows it to solve its financial issues, avoid insolvency and bring about a complete financial recovery.
Get expert financial help
Does your company need cash? When your company experiences cash flow issues, it’s essential that you think and act quickly to avoid creditors becoming frustrated and taking legal action.
There are several emergency financing solutions available for companies that are held back by short-term cash flow issues, ranging from emergency loans and asset-based financing to invoice factoring and discounting.
Contact us to speak to a finance expert and learn more about the emergency finance options available to help your business recover. We can provide help and assistance to ensure your company has a chance to overcome its cash flow issues.