Posts Tagged ‘business finance contingency planning’
Debt Financing Contingency Planning
January 26th, 2011
“Do You Have A Debt Financing Contingency Plan In Place?”
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.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingBusiness Finance Contingency Planning
May 2nd, 2010
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.
Click Here To Speak To Business Finance Specialist Brent Finlay
Business Financing