I’m putting my own money into a struggling company – is this unwise?

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Updated: 5th February 2021

Should you self-fund your limited company?

When your business takes a turn for the worse, it is natural that you are willing to do anything in your power to keep it alive and continue trading. In some cases this means turning to personal savings in order to plug the shortfall in the company’s cash flow.

In some instances, introducing personal funds as either an investment or loan to your company can be a good move. If the funds are readily available then this is often a considerably quicker way of injecting cash into a business rather than going through the process of securing outside funding; it can also be a much cheaper way of borrowing compared to a traditional bank loan.

Be aware of the risks

While lending money always comes with an element of risk, if you are advancing funds to a company which is struggling financially then you need to understand that there is a real chance of you losing this amount should the company’s financial situation not improve long-term. While this introduction of cash may give your company breathing space for a few more months, should the business continue to struggle, then not only do you stand to lose your company, but also the personal funds you have invested as well.

Understand why you need finance

Before lending any of your own money to the company, you need to take an objective view of your business and decide whether this would be a smart investment. Understand the reasons behind your company’s need for finance. If the company has suffered an instance of bad debt or is struggling to manage its cash flow due to a late payment due into the business then a short-term loan you’re your personal finances may be suitable.

However, if the company’s sales have dried up and there is simply not enough money coming in, then you need to decide whether the business has a realistic future. If the money will only paper over the cracks in the short-term then you may need to think of other options.

What happens in the event of business failure?

Money you loan to your company would typically be accounted for as a credit to your directors’ loan. This means that should the worst happen and the company enters liquidation, you would be classed as a creditor of the company and would be able to submit a claim for the amount outstanding.

However, the issue is that you would rank as an unsecured creditor alongside customers, suppliers, and other unsecured lenders such as loan and credit card providers. In the majority of insolvent liquidations, there is typically very little money left in the business by the time secured and preferential creditors have been paid, meaning a distribution to unsecured creditors is never guaranteed.

Consider outside funding option

Before raiding your personal savings, you may wish to consider other forms of lending first. This does not have to be a standard bank loan; there are a variety of commercial finance options each tailored to what you need the funds for. If you are looking to purchase a vehicle or a piece of machinery, for example, then asset-based finance may be ideal. Similarly if you are having issues managing your cash flow caused by customers paying late, invoice factoring or discounting could be an appropriate solution.

Of course for the majority of third party finance applications you will need to pass a credit check in order for the funds to be granted. Many people turn to self-financing once they discover their applications for outside funding have been knocked back. However, if you are getting rejected for traditional forms of lending you should consider why this is. If the banks do not see your company as a good investment, then you should think carefully about whether you should be investing your own money into this venture.

What next?

If your company is struggling financially and you are considering putting your own money into the business, or if this is something you have already done yet are still finding the figures are not adding up, contact Real Business Rescue today. Our team of licensed insolvency practitioners will expertly assess the situation both for your company and you on a personal level. Depending on the company’s ongoing viability we can explore the possibility of securing finance, or else look at other ways of restructuring the business. Contact our experts today on 0800 644 6080 to arrange a completely free no-obligation consultation.

Jonathan Munnery


0800 644 6080
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