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5 Reasons to Use Asset-Based Financing Over Opting for Liquidation

assett liquidation

Most businesses with poor cash flow and overwhelming debt obligations are typically hindered by a poor credit rating as well. The inability to obtain conventional financing may lead the directors of such companies to feel as though going out of business voluntarily is the only remaining option.

However, if your company has valuable items or property that can be used as collateral, it may still be possible to apply for an asset-based loan or line of credit. This type of emergency funding is often used to rescue distressed businesses that need to quickly boost available capital in order to satisfy creditor payment demands.

If you’re doubtful about your company’s ability to obtain approval for secured financing, or if you’ve already conceded to the failure of the business, you may still want to consider the following five reasons to apply for asset-based financing instead of entering into voluntary liquidation:

1. Preventing Company Closure

If you’re intent on saving the business then chances are you’ve already invested a significant amount of time and effort into an endeavour that you had previously thought was going to be successful. So why should you throw in the towel prematurely when you may still be able to facilitate a last-chance recovery by leveraging the assets that your company has worked so hard to acquire?

It may seem like putting an end to the company will provide relief from creditor pressures, but in reality most business owners look back and regret the decision. If you’ve already examined every other option and none of your efforts have been successful, asset-based financing may be the solution you’ve been looking for.

Read more on company closure action points here.

2. Avoiding Legal Consequences

After the voluntary liquidation sale, the appointed liquidator will be legally obligated to conduct an investigation into the affairs of the company and the actions of each individual director. Although the liquidator (a licensed insolvency practitioner) will be able to provide advice and help you prepare for the proceeding, there is still a possibility that evidence of wrongful or fraudulent trading may be found, in which case your liquidator will have no choice but to report such findings to the court.

The possibility of facing legal consequences may not be intimidating if you feel as though you’ve been fulfilling your duties as a director, however you may be surprised at the actions that could be considered an offence. For example, if you continue conducting business transactions after having knowledge that the company had no prospect of being able to repay its debts, this could be construed as wrongful trading.

3. Adding Leverage to a CVA Proposal

A company voluntary arrangement (CVA) is a formal agreement between a company and its creditors. It is a common alternative to liquidation and is frequently used as a way to protect a business from legal action. If the CVA is approved it would create a centralised payment plan that typically lasts from 3-5 years. Although this type of arrangement has a higher approval rate than informal negotiations, creditors will sometimes request that a down-payment be made before they’re willing to approve the CVA proposals. Asset-based financing can provide the business with the funding it needs to satisfy the demands of creditors and facilitate the approval of a viable and mutually beneficial CVA. On the other hand, if you concede to voluntary liquidation your company’s assets will be sold and used to repay creditors. Therefore, it may be more logical to attempt to use these assets as collateral before resorting to losing them altogether.

4. Protecting Personal Funds

Initiating voluntary liquidation can be a relatively costly process because you’ll have to pay liquidator fees and other Court costs. If your company does not have enough funds to cover the cost of voluntary liquidation, and the directors are concerned that waiting for the business to be wound up by creditors could present the risk of wrongful trading accusations, the only option left may be to pay for the cost of the liquidation out of the directors’ personal funds.

Furthermore, although there is a decreased risk of being convicted of wrongful/fraudulent trading during a voluntary liquidation, it is still a possibility that the directors could be held personally liable for company debts, particularly if they signed personal guarantees or took out loans after having knowledge that the business was insolvent with no prospect of recovery.

5. Preserving Company Assets

When you enter into voluntary liquidation you have to accept the fact that all assets will be sold so that the proceeds can be used to repay the company’s debt. Unless a pre-pack administration sale can be arranged there is no possibility for the directors of the business to keep the assets they have worked so hard to purchase and maintain.

An asset-based loan would let you leverage your company’s belongings to obtain funding without actually having to lose the assets used as a security. Even so, it is important to note that in comparison to unsecured funding solutions, asset-based financing is more of a risk when it comes to protecting assets because there is a possibility that the items you use as collateral could be taken from your company in the event the loan is defaulted on.