What is turnaround finance?
Turnaround finance can be defined simply: it’s funding for a struggling but viable business that needs assistance. Companies pursue turnaround finance for a wide range of reasons, including disruptions to cash flow or restrictions on credit. Many successful businesses experience temporary drops in revenue due to losing one of their clients or another unplanned situation. These situations can leave the company with little resources despite it otherwise being profitable.
Turnaround financing is often viewed as a risky activity by lenders, so it can be quite expensive for your business. However, when used properly, it can be just what’s required to save your business from becoming insolvent. Provided your company is still a viable business and its problems are temporary, turnaround finance could be the ideal option for freeing up capital to pay creditors and get your business back on the right track.
When should you consider turnaround finance?
Turnaround finance isn’t suitable for all businesses. In order to qualify for financing from most lenders, your company will need to have a proven businesses model and a history of profitability (or at least stable, regular revenue) from its customers.
Lenders offering turnaround finance typically look for successful companies that are temporarily in a bind. Situations such as the loss of a major client or a restriction on another credit source are ideal opportunities for turnaround financing. Your business should only consider turnaround financing if it has a history of good results and profitability, as well as a proven business model.
Businesses that aren’t viable, whether due to a poor business model or debt, aren’t suited for financing. A wide variety of options are available for struggling businesses, from financing to administration. Turnaround financing is generally a better option than alternatives in the following situations:
- Your company is profitable, but has experienced a temporary setback or drop in revenue that’s affecting cash flow, such as the loss of a major client, broken or damaged equipment that needs replacement or a slowdown in sales.
- You have an effective, actionable plan for turning the business around using the money you raise. This plan should include information on how you will avoid similar interruptions to cash flow in the future.
- Your company can easily pay back its creditors within the agreed time period. Paying back its creditors will not have any negative effects on your company’s cash flow during the repayment period.
- Your company has very little resources, despite having regular cash flow and healthy profits.
Turnaround financing is most commonly used by companies that are experiencing a temporary setback, not those with long-term issues. If you believe your company can continue trading – and even grow its revenue or profits in the future – but needs help escaping a difficult situation, it could benefit from an injection of capital via turnaround finance.