You need cash in a hurry
Things aren’t going very well – you need finance, and fast, because your business is under threat from a cash-flow perspective. In many ways this is similar to the module Do you need finance for working capital? but with one huge difference: the finance is needed immediately. This was not something that you had anticipated and hence it is an emergency situation.
How lenders respond to emergency requests:
The reasons why you need emergency finance will dictate how easy it will be to get. Another factor that can make it simpler is if you have an excellent relationship with an existing lender, and have proven your creditworthiness by always repaying loans on time. In this case, you would need to convince them that the emergency did not arise through poor management, but rather from external factors beyond your control. They should then be willing to help you, provided that you can show how the cash-flow situation will correct itself in the near future, and that they are only supplying bridging finance.
For example, you might have completed work with a government client and had anticipated being paid within 60 days. However, due to issues such as local elections, all payments have been delayed and you are unlikely to be paid for another month or two. Since this was a large contract, it can leave you with a temporary cash flow problem, even though you know the money will be paid soon. Provided you have all the documentation, and preferably a letter from the relevant government department stating when payment will be made, your lender should be able to help you.
On the other hand, if your business has simply run out of money due to poor sales or management decisions, you will find it extremely difficult to persuade lenders to grant you a loan. Emergency finance always makes lenders nervous.
If the emergency is caused by poor management or processes, then they would consider the risk too high. A once-off error in judgment, such as signing an overly expensive lease, could be acceptable to a lender, only if a clear plan for down-scaling is presented. But if you can’t convince a lender that you won’t regularly find yourself in a similar situation, then you aren’t going to get the finance.
A significant increase in sales
Sometimes you need emergency finance, not because problems have caused a cash-flow issue, but rather because an opportunity has come knocking. A good example of this is if you win a tender (which you are legally obliged to fulfil), but don’t have the money to finance it. Luckily, it is often easier to raise the finance in this type of situation, because the tender itself can be used as leverage to raise the funds. If this is the case, then read the Do you need finance for a contract? module.
If the reason for the emergency is due to errors on your part, then now is the time for an honest appraisal of your business and how it operates. You are at a point where you need to decide whether further investment into the business will yield results, or whether this is throwing money away and it is time to liquidate. Even though money is very tight, it can help tremendously to get professional advice from an experienced advisor familiar with emergency situations, who can advise whether filing for business rescue would be a useful option.
Make it easier
Emergency situations demand that all your business paperwork is readily available, and there is no time to wait whilst it is developed. Hence it is a good idea to always make sure that the following documents are updated and available at all times:
- Business plan.
- Marketing pack.
- Bank statements and reconciliations.
- Management accounts.
- Tax clearance certificate.
This is the part where many small businesses fall down. They do not have these documents readily available, so access to emergency funds is impossible.
You will most likely have a long list of creditors, and it is important to be honest with them about the delays in payments, and what steps you are taking to rectify the problem. Your efforts to keep people informed maintains a good relationship that will not be forgotten once the hard times are over. Managing creditors is all about open communication on a regular basis, even if the message is not what they want to hear.
In the event that you are unable to raise finance and are forced to liquidate, then make sure that your creditors know what is happening and have the details of the company handling this matter.
Some business owners make it a point to honour their debts and pay them back, even if it is over a long period and they go into liquidation or are sequestered (and therefore legally absolved from paying the debt back).
It may be argued that the South African finance system does not acknowledge such efforts enough, but such integrity can be a major advantage during your second or third try at running a business.
What are your options?
The amount of finance that you require will dictate which of the options below is most useful for your business. For large amounts, equity finance and term loans might be the way to go. Smaller amounts could be financed through personal or business finance options such as overdrafts, credit cards, home mortgages or perhaps friends and family. Debtor finance will only work if you have a short-term cash flow issue and a large debtors’ book.