We are now in a time when there are no real predictable rules with respect to business financing and capital procurement, creating a greater need for business finance contingency planning.
There are two basic types of contingency planning business owners and managers need to be consider these days.
The first has to do with existing loans and debts on the balance sheet. Its not uncommon these days for lenders to cut back the limits on lines of credit and trade suppliers to reduce credit lines. So even if the economy in general is not providing a negative impact on the profitability of your business, the business cash flow management process can be turned upside down by things completely out of control of the business manager or owner.
Demand loans for equipment can also be called at any time without a formal reason or negative repayment action on the part of the business. This provides a stronger case for term loan products that do not provide the lender with such broad and subjective repayment options.
And in cases where a business has become late on payments or offside with debt facility covenants, it can’t be assumed that the lender is going to work with the owner or manager even if the cash flows are minor and expected to be rectified in the short term.
For existing debt or credit reliance, the business needs to develop contingency plans that will identify alternative sources of credit that can be secured and the related cost. This has to be continually explored on a regular basis as alternative financing options will change as time goes by as well. And the process can’t start when you have a financing problem as it can take more time than you may have before the business is negatively impacted.
For new business financing, the contingency plan that I would recommend is to start the process sooner even to the point when any new strategic direction is being contemplated. The typical planning approach is to do what’s best for the business and then look for the money that’s required to administer the plan when required. But the probability of finding and locating the desired capital has gone down on average, so it makes a great deal more sense to scope out the capital markets first and then adjust the strategic plan accordingly if required. This is far more strategic than just assuming funding will appear when required.
Business finance contingency planning needs to take on a greater importance with all businesses that are serious about their ability to survive the current recession and profit into the future.