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Thursday, 29 August 2013

Are you putting money into your business?

Are you putting your own money into your business to make it grow or to stop it collapsing?

This is the question that owner/directors of companies have to ask themselves.  Of course, many successful businesses have benefited hugely from the owner stumping up the cash as the bank or potential investors haven't bought into the untried business model.  Consequently, the owner doesn't owe anything to anyone and when stellar performance comes along they are sitting pretty.

What if the business has been going along time, it is in an established market, plodding along, and does not have a unique product or service but the directors are not drawing any funds or are funding the business to pay the wages.  Our advice is to be very wary and do a thorough cost benefit analysis of what you are doing. Could it be that the company could restructure some of its debts, ask for more time to pay debts, cut costs etc?  There is a huge amount of information on our company rescue site about this but readers might be interested to hear about a recent report the ICAEW commissioned by the BDRC Continental ( downloadable from the link ) that has pointed out that  40% of SME's were being funded by way of personal monies.  Interestingly, 20% of those respondents said they felt that they HAD to make this investment rather than using it to fund growth or new projects.  It also showed that the higher the credit risk rating of the company the more likely they were to use personal funds.  This statement stands to reason in the case of start ups but is also true for respondents that said they HAD to make the injections of capital.

The research also looked at other forms of finance for SMEs and concluded that there was an uplift in the external finance such as credit cards, loans, factors, and personal monies in Q2 2013 when compared to Q1 from 39% to 44%.  Also perhaps unsurprisingly we have seen that the use of bank overdrafts has declined.

So if you are putting in lots of money into your struggling company it may be worth considering how you can protect your position if the business fails.  It may be that you take out a debenture ie some sort of security over the business.  For more information on charges see our pages on fixed and floating charges.  It would be advisable to seek legal advice before lending money to your own company.  We know lawyers who can help with this.  But before you do this talk to us for a reality check to see if you are risking too much as you are emotionally attached to your company.

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