Posts Tagged ‘debt consolidation’
Guide To Debt Consolidation
November 15th, 2010
“Here Are Some Things To Consider Before Going Through a Debt Consolidation Exercise”
While there can be many reasons to undertake a debt consolidation in your business, the single biggest reason, most of the time, is to improve cash flow.
And while cash flow can be constrained due to rapid and profitable growth, the majority of the time it is constrained by some down turn in the business or failure of the business to develop to a level of sustained profitability.
For these types of situations, here are some basic guidelines to consider before entering into a business financing debt consolidation action.
First, start the process as soon as you have consecutive months of cash flow deficits. Nothing about business financing is fast these days, so the more time you have to work through the problem, the more likely you’re going to end up with a workable outcome. And just because you started the process doesn’t mean that you’ll end up completing a consolidation action as things may change in your business for the positive before the process is completed.
Second, cash flow out your business for at least the next 6 months. If the ship is taking on water so to speak, at what point in time is monthly cash flow going to be positive again and how much money is going to be required to get you from here to there? For cash flow shortfalls, debt consolidation typically means refinancing existing debts that have fallen behind or are building up plus adding additional cash to the business to service the new loan until things turn around. There is no point getting a consolidation loan only to immediately fall into arrears with a new lender.
Third, factor in a higher cost of capital than what you’re already paying or not paying. Part of the cash flow exercise is to make sure that the go forward cash flow, post debt consolidation, is going to be positive. If the new cost of capital is significantly higher than what you were budgeting, your whole cash flow plan may go out the window.
There are two ways to do debt consolidation to improve cash flow. The first is to find a refinancing solution that will buy you more time and hope things work out before you run into cash flow problems again. The second way is to figure out a plan to get things corrected in the business and acquire incremental funds through refinancing to make the plan work plus some margin for error. In most cases, debt consolidation is a form of bridge financing that will allow you to get through a certain period of time of financial down turn. When things get better, you may choose to refinance again to accelerate debt pay down and/or acquire a cheaper source of financing.
While no plan is fool proof, having a plan is going to give you a better chance to improve the fortunes of the business and provide greater credibility in the eyes of lenders that are prepared to provide a debt consolidation loan in the first place.
The keys are to start early and be realistic of what the near future is going to look like. Being overly optimistic with respect to near term improvements in cash flow can lead to further problems.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThere Are 4 Reasons To Secure Capital For Your Business
November 13th, 2009
Can You List The Four Reasons Why Someone Would Need To Secure Capital?
There are 4 and only 4 reasons to secure capital for a business. Each reason or purpose for business financing will impact the type of lender or investor to approach as well as the manner in which you approach them.
The 4 reasons for seeking more capital for a business are as follows:
Start Up. At the commencement of a business entity or operation, funds may be required for working capital, fixed assets, intangible assets, leaseholds, inventory, and so on.
Growth. An existing business looking to expand may require capital to increase its capacity as well as the working capital required to fund a larger volume of activity.
Acquisition. When one business acquires another, it must purchase either the shares or the assets of the target business with a combination of cash and external capital from debt or equity sources.
Debt Consolidation and/or Re-organization. In times of business downturn that create financial losses, capital must be injected into the company from debt or equity sources to cover the costs of operation and allow the company to continue. Another scenario would be when the term structure of the debt outstanding does not match up against useful life of the assets securing it. In these cases, a debt restructuring will take place to balance out the balance sheet. A third example would be when outstanding debt exceeds the leverage against equity allowed by the lender, requiring a debt reduction and/or an infusion of investor or shareholder equity.
Each of the reasons to secure capital or apply for business financing have their own lending and investing criteria. A business manager or owner seeking incremental capital would be well advised to gain a greater understanding of what is required for each and work towards identifying lenders and/or investors that are relevant before proceeding too far with any inquires to secure business capital.
We will get into more of the specific for each of these uses of funds in future posts.
Business Financing