First of all, what do I mean by a debt financing contingency plan?
Well, if you’re in business and require third party debt financing to partially fund your operation in some way, shape, or form, then it’s important to have a debt financing contingency plan in the event that your current debt lender or lenders can no longer provide you with funding.
This has always been something that business owners should be mindful of, but most stable businesses consider the potential of their banking or financing relationship going south for no apparent being the most unlikely of events and not worth the time to continually stay on top of a contingency plan.
But guess what? Since 2008, the one of the most common financing requests are those that are required for no reason at all…that is one or more of the lenders financing a given business either called in their demand loans and chose not to renew them…for no apparent reason.
As I continually mentioned, the world of business financing has significantly changed during this last go round of economic down turn and the ongoing ripple effect from the fall out continues to pound the portfolios of the remaining debt providers. As a result, they will periodically need to shore up their risk profile by shedding accounts that don’t score high enough on the score card, or leave certain regions and/or markets altogether.
The end result is that many companies with otherwise solid balance sheets and a significant track records of business performance are getting their loans called for nothing they could have foreseen.
When this occurs, if there isn’t some type of meaningful contingency plan in place, the scramble to get alternative financing in place at best destroys equity due to higher short term rates, and at worst puts the company out of business.
So what do I mean by a contingency plan?
While by no means a comprehensive list of things to do, here are a few points that every business owner requiring third party capital to operate should consider.
First, make sure you maintain a relationship with your current banking representative. For many institutions, the personnel turnover very quickly from position to position. For many businesses, the owner may not even know who his contact in the bank or lending institution is. Having an active relationship where there is at least a quarterly touch point can help spot trouble before it lands on your door step.
Second, stay on top of who your next best option or options are and find a way to borrow some money from them. Its always going to be much easier to get additional financing from a debt provider that is already somewhat comfortable with you as compared to someone starting from scratch where there is a time pressure involved in getting a new facility in place.
Third, keep all your financial statements, asset lists, customer lists, credit profiles, company business plans, etc. up to date so that you’re always in a position to provide a complete package of information at any time or within very short order if required.
Fourth, constantly be on the look out for even a better debt financing program than what you have today, or alternatives that would also potentially work for your business. Debt lenders come and go as well as continually change their appetite for certain types of lending and industries, especially on a regional basis. So if someone is hot for getting into your market, take a serious look at what they have to offer and at least consider starting a relationship.
Fifth, maintain a moderate level of paranoia with your current debt financing source or sources. Banks and other institutional lenders are brilliant at lulling you into a false sense of security. But be forewarned… there is appreciable customer loyalty, at least not enough to save your account if you get in the risk managers cross hairs for whatever reason.
I understand that some people reading this will say they don’t have time as it is to do the daily stuff required in the business let alone make and continually update a back up plan for something that may never happen.
Just remember that if you accept debt financing or investor money from a third party that someday they’re going to want it back and it might now be when you’re ready or able to accommodate them.