Financial struggles have become a common occurrence for businesses, especially those that are still grappling with the aftermath of the pandemic. The PwC Restructuring Update has revealed that insolvencies have increased by 54% in the first half of 2023 compared to the same period last year. Furthermore, over 6,000 companies that participated in the debt warehousing scheme now owe an average of €300,000 each. These companies have until May 2024 to come up with repayment arrangements with Revenue.
This issue is not unique to Ireland; the UK has also experienced a 40% year-on-year increase in insolvencies in May 2023. Similarly, the United States has seen the highest number of companies filing for bankruptcy in over a decade. While obtaining the right financing can be a lifeline for struggling businesses, the current inflationary environment may deter them from taking on additional debt.
The World Economic Forum’s midyear risk outlook indicates that while headline rates of inflation are starting to decline, they continue to shape the economic risk landscape. This is particularly evident in the form of increased interest rates, which have reduced demand and raised borrowing costs. Despite these challenges, if there is potential for future profits, it is crucial for businesses to assess their financial situation and identify the root causes of distress. Developing the right turnaround and growth strategies can provide hope for recovery.
In addition to taking on debt, a well-crafted restructuring plan can be instrumental in the recovery process. Seeking advice on corporate restructuring from experts can help navigate this complex journey. Companies may encounter difficulties for various reasons, but they may still have a viable core business if they can secure the necessary financing for restructuring. James Anderson, a partner in turnaround and restructuring at Deloitte, emphasizes that there are now more lenders and finance options available to businesses in Ireland. Lenders will assess factors such as underlying asset quality, business cash flows, and repayment capacity when considering lending to businesses.
However, Anderson cautions business owners against borrowing in the current climate. While there are numerous funding options available, careful consideration of the impact of new or additional debt on cash flow and profitability is essential before pursuing such avenues. For business owners facing the need to secure funding for a struggling but potentially valuable business, Anderson advises taking action as early as possible and seeking expert help without delay. Obtaining advice during financial difficulties provides businesses with more time and options.
While the present may not be an ideal time to take on debt, it is never an ideal time to let a potentially viable business fail. Understanding the current financial position and exploring available options, including new or additional funding and its impact, are crucial for navigating through periods of financial volatility. Transparency with stakeholders is also vital during times of crisis. Maintaining open lines of communication with employees, creditors, suppliers, and customers helps build trust and may lead to more favorable terms or extended deadlines, optimizing cash flow.
Credit Review, an agency established in 2010 by the minister for finance, serves as a resource for SMEs, sole traders, and farm enterprises that have been denied loans or had their credit facilities reduced or withdrawn. The agency supports business owners through a review and appeals process if they have been refused credit from participating banks. Catherine Collins, head of Credit Review, notes that while the agency’s case volume has not significantly increased, the cases they handle have become more complex, with more companies seeking funding for restructuring. Banks are now scrutinizing businesses more closely than before, conducting in-depth evaluations.
Despite the exit of Ulster Bank and KBC from the Irish market, there are currently more options available for SMEs seeking finance. Michael Lalor of Focus Capital Partners highlights the emergence of private credit as a key driver, with international institutions such as pension funds, insurers, asset managers, family offices, and debt funds directly lending to customers. Ultimately, if a company can demonstrate viability and present a compelling case for long-term profitability, there is a strong chance of securing the necessary funding. Lenders typically assess the business’s ability to repay or service the loan over a defined period and determine whether the leverage is appropriate for the profitability of the business.
Rescuing a struggling business requires determination and resilience, and there are no guaranteed outcomes. However, with realism and tenacity, businesses can strive for a phoenix-like resurgence.