Beware of borrowing the way out of a cash crisis
THE cornerstone of all economic development is the movement of money, with even the most successful businesses taking on loans to assist in growth.
But Sheffield financial expert Deborah Lockwood is warning that the current climate and an increasing dependence on borrowing might finally be doing more harm than good for struggling companies.
And businesses which have depended on borrowing to survive the ravages of the pandemic might now be more vulnerable to failure.
“During the pandemic, some businesses took on levels of borrowing that they would previously have never considered taking on, nor would they have been approved or been able to obtain such large amounts,” said Deborah, partner in Sheffield insolvency and business turnaround specialists Graywoods.
“That, coupled with arrangements with creditors including HMRC, is bringing companies to the point where they are gathering levels of debt where even repayment plans are becoming unmanageable.”
Deborah added that it was businesses which had, prior to the pandemic, been reluctant to take on high levels of borrowing, which were now being left particularly vulnerable.
“They saw borrowing for the first time perhaps as a way out of a cashflow crisis but taking out loans for additional funding can be a very problematic approach and certainly a short term one which had no view of the future with no thought for underlying issues such as reduced customer demand, increased costs and other uncertainty,” she said.
“Directors should not be committing to additional borrowing without having a full understanding of the company’s current financial position and a realistic cash flow projection in order to justify their actions.
“Above everything else, they need to be mindful of their current levels of debt and not simply act without due care and attention and without thinking of the consequences of their decisions.
“Such decisions may lead to asset erosion resulting in even greater costs and vulnerability moving forward.”
“There are so many different ways in which people try to work their companies out of the situation that taking on extra borrowing has caused but these need to be considered very carefully and, as ever, the best thing to do is to seek professional advice before before committing to an arrangement that simply adds to the problem.”
This was posted in Bdaily's Members' News section by John Highfield .
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