Exiting Working Capital Finance

Working capital funding is often the key part of financing a company’s growth. The challenge for many businesses is the reliance on these funding methods, reliance on any single supplier (including lenders) is a risk that too many businesses are not prepared for.

The main forms of Working Capital Finance include;

• Factoring
• Overdrafts
• Invoice Finance

All these serve a purpose, although it is not unusual to find a business using one form of working capital finance when another method would be far better.

The challenge for many businesses is that over time the need to finance their working capital grows, the business develops and more finance is taken on. Finding an exit from working capital finance products becomes increasingly difficult with limits increasing, levels of debt chasing turnover and spare cash paying the bills.

The Eternal Circle

There is a point in a business when the growth generates cash, which if retained can then become a means to self finance your trading cash need. The issue is that there is a balance on the working capital finance which until repaid cannot be exited.

It is a bit like buying on the never-never, at some point you have to pay the balance and until that time all you are doing is servicing interest.

Historically the only way to break the circle was to put cash into the business, either by way of external injection or through a refinance. The problem with this was finding the cash to throw in, or that a refinance required security as the new loan would not be secured on book debts.

All Change For 2015

The problem of finding a lump of cash or providing more security can now be a thing of history. It is possible to capitalise a business’s working capital finance, secure that loan against the book debts and move out of the eternal cash flow finance circle.

The solution lies with crowdfunding in a very niche and specialist way. The advantages this brings is that there are

• No PG’s required
• Trading performance is far less important
• Director’s personal security not required

The main criteria are that book debts must be viable. This means a decent audit trail and a reasonable quality of debtor. This is generally not an issue when repaying invoice finance as debtor quality and audit trail are a prerequisite of invoice finance in the first place.

Don’t get me wrong, I am not anti invoice finance. It is a great solution for many trading businesses and one I have recommended on many occasions. However, like any situation where you are borrowing there needs to be an exit strategy which until now has been difficult.

If you use invoice finance, factoring or have a hefty overdraft then there may be an option here that you want to consider.

By Dave Farmer

Dave Farmer is founder of the award winning business finance specialist Lime Consultancy. Based in Sussex Lime Consultancy provide business finance solutions to companies across the UK.

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