Borrowing remains one of the cornerstones of business recovery

Financial struggles can strike even the most promising businesses, some of which have not yet recovered from the balance-sheet challenges of the pandemic. Restructuring is on the rise, with a 54 per cent increase in insolvencies in H1 2023 compared to the H1 2022, according to the PwC Restructuring Update. It further reports that more than 6,000 companies that availed of the debt warehousing scheme owe an average of €300,000 each. These companies have until May 2024 to make repayment arrangements with Revenue.

It is a global problem. A 40 per cent year-on-year increase in insolvencies was recorded in the UK in May 2023. Meanwhile, across the Atlantic the trends are similar, with the highest number of US companies filing for bankruptcy in more than a decade.

While securing the right financing can be a lifeline to save a potentially viable and valuable business, in the current inflationary environment now may not seem like a good time to take on debt, especially for an already struggling organisation.

According to the World Economic Forum’s midyear risk outlook, headline rates of inflation have begun to fall but they continue to shape the economic risk landscape, not least through increases in interest rates that have squeezed demand and pushed up borrowing costs.

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However, even with increased costs of borrowing, if there is potential for future profits it is worth digging in and making a clear-headed assessment of the financial situation. Pinpointing the root causes of financial distress and mapping out the right turnaround and growth strategies can give rise to hope.

In tandem with taking on debt, a well-crafted restructuring plan can be the cornerstone of recovery. Advice on corporate restructuring can prove invaluable in navigating an intricate process. Companies can get into difficulty for a variety of reasons but may still have a viable core business if finance can be raised to fund a restructuring.

James Anderson, a partner in turnaround and restructuring at Deloitte, says there are now more lenders and finance options available to companies in Ireland. In order for businesses to prepare for approaching potential lenders, he advises that lenders will “look to the underlying asset quality, business cash flows or repayment capacity – and the owners – in their lending assessments”.

However, he urges caution to business owners thinking of borrowing in the present climate.

“Whilst there are many funding options available, businesses should carefully consider new or additional debt, given the current interest environment,” says Anderson. “Having a clear understanding on the impact that new or additional debt will have on the cash flow and profitability is critical in deciding whether to pursue or not.”

To business owners who find themselves in the position of needing to secure funding to save a failing but still valuable business, Anderson recommends acting as early as possible and looking for expert help sooner rather than later.

“Getting advice in times of financial difficulties affords businesses more time and options,” he says.

While now is not an ideal time to take on debt, it is never an ideal time to let a potentially viable business go down the drain.

“Given the many headwinds facing Irish businesses, understanding the current financial position and the available options – including new or additional funding and its impact – is critical to navigating through a period of financial volatility,” says Anderson.

Also critical to navigating a period of financial volatility is transparency with stakeholders. Trust is paramount in times of crisis and maintaining open lines of dialogue with employees, creditors, suppliers and customers will serve businesses well. Initiating negotiations with creditors and suppliers may also prove fruitful, yielding more favourable terms or extended deadlines, which can help optimise cash flow.

Credit Review is a sympathetic port of call for many SMEs, sole traders and farm enterprises that have been refused a loan, whose credit facilities have been reduced or withdrawn or whose bank debt needs restructuring. The agency was established in 2010 by the minister for finance to ensure the flow of credit to viable Irish businesses; it supports business owners through a review and appeals process if they have been refused credit from participating banks.

Catherine Collins, head of Credit Review says that while the agency’s case volume has not increased significantly, the types of cases it sees have become more complicated, with more companies looking for money for restructuring. In the current climate, she says, banks “are going to look very closely at all of your business and probably do a deeper dive now than they might have done previously”.

Despite the exit of Ulster Bank and KBC from the Irish market, there have never been so many options for SMEs seeking finance, according to Michael Lalor of Focus Capital Partners.

“The emergence of private credit has been a key driver, with international institutions such as pension funds, insurers, asset managers, family offices and debt funds lending directly to customers,” he says.

In essence, if a company can demonstrate viability and craft a compelling case for long-term profitability there is a strong chance it will be able to source the funding it needs.

Lalor points to two key metrics: “Can the business repay/service the loan over a defined period?” and, “Is the leverage of the business appropriate for the profitability of the business?”

Typically these will be assessed and applicable covenants set out by the funder.

Rescuing a struggling business demands determination and resilience and there are no guaranteed outcomes. But realism and tenacity will go a long way towards a phoenix-like resurgence.