Accessing Capital When Traditional Credit is Constrained
By Mike Semanco, President, Hennessey Capital
What is a borrower to do? Although the traditional credit market is showing signs of life, businesses are still facing a challenging credit market. Hard asset (equipment and real estate) collateral values have dropped dramatically so refinancing of loans requires more cash in each deal. Younger companies still require a track record, typically 2 years, to qualify for traditional lending. Because of constrained credit conditions, companies have to think outside the traditional box to finance their business.
In our business, we have seen companies negotiate preferred payment terms with their customers. Down payments, progress payments and shortened A/R terms are being pursued as viable alternatives. Companies who have normally written off the notion of factoring receivables are now using it as a standalone financing product or using it in addition to current bank lines to fund incremental growth. ABL lines of credit are now more mainstream since most ABL lenders are focused on collateral and not solely on cash flow.
In addition to working capital alternatives, companies are looking at micro loan programs and seed funds to help with growth financing. These loans are usually under $50,000 but can make a difference to a young, growing business. State funded programs are constrained with lack of cash but could also be a source for creative financing. PO Financing for distribution businesses remain a good source of capital but project financing for manufacturing companies is non-existent in the traditional market.
Young companies are traditionally undercapitalized. In a tightened credit market, this creates more stress when new opportunities become available. Communication is always the key. Ask your banker if options exist outside their world. Do be afraid to ask customers what may be available. If customers like your product or service, they may be open to concessions. Ask your professional advisors to make introductions to funding sources. They should be aware of various options and point you in new directions.
Credit is available. You may just need to look outside the traditional box to find it.
Your Bank Issued a Demand Letter: Now What?
Filed under: Business Tips & Tactics, Finance Talk
By Jeff Wright, Senior Vice President, Hennessey Capital
The principal owner of the company is usually surprised and upset when receiving a demand letter from the bank requesting that he/she pay the loan in full in 10 days. Chances are that when a bank issues a demand letter, the owner has defaulted on the loan under the terms and conditions documented in the Loan and Security Agreement. Failure to make timely payments and violation of financial covenants are common reasons that trigger the issuance of a demand letter. Do not panic and assume the company must go out of business and close its doors. This is the traditional first step banks take to collect on a loan.
Do not ignore the letter! The bank will take steps to protect its interest, which might be contrary to what you deem are the company’s best interest. Contact the loan officer and schedule a meeting to discuss what the bank’s intentions are with the loan relationship. There may be an opportunity to restructure the loan under new terms and conditions. If the bank presses to be paid off in full, it is unlikely you can obtain alternative financing on such short notice. This takes time and may require negotiating a Forbearance Agreement.
Under a Forbearance Agreement, the bank agrees to forbear from taking any actions to collect the loan for a period of time, usually one to six months, provided you meet defined hurdles in operating performance, reducing the bank’s loan exposure, improving its collateral position, and/or providing evidence that alternative financing is being sought. The agreement will also ask you to acknowledge the default, confirm the balance owed, reaffirm your guaranty, and waive any claims you may have against the bank. You can also expect the bank to increase your interest rate, charge additional fees, ask for additional collateral, and/or reduce advance rates. It does, however, buy you time to find another lender.
Prior to meeting the bank, review your documents, preferably with your attorney, to determine what rights you have. Many bank documents allow a “cure period,” which allows you time to mend the default. Also have the attorney or advisor with you when you meet with the bank. Many business owners do not understand this process and it is critical to have a trusted advisor there to represent you and protect your interests. Be prepared to provide the lender with financial and collateral information that supports your plan to pay off the bank in a timely manner, with proof the company is viable and that the bank’s loan exposure will improve in the interim.
Bring a current financial statement, receivable and payable agings, inventory numbers, and operating and cash flow projections, supported by open purchase orders and backlog reports that support projected revenues and overhead cuts made to improve cash flow. Understand what your cash needs are over the short term. Cash is king at this point. Having access to capital is key to the company’s survival. Use your trusted advisors, i.e. attorney or consultant, to help in preparing your plan and in negotiations. They also have resources that can assist you in finding alternative financing if that becomes necessary.
During the forbearance period, the bank will be monitoring the company’s performance and will take more aggressive action if they believe their loan loss exposure has increased. This will be evident if there is a default in the Forbearance Agreement or troublesome information is obtained through their due diligence. Be honest and up front with the bank and don’t be afraid to communicate bad news. Hiding information from the bank can result in broken trust and the bank’s unwillingness to cooperate in the future. They may take action to have a third party involved to protect their interest.
As a last resort, consider filing for bankruptcy protection. Bankruptcy will allow you time to reorganize the company with less debt. Unsecured creditors and some secured creditors debt can be negotiated at a discount and paid over time. Do so only after considering the consequences. Will you have the support of key vendors and customers going forward? Who will fund operations while you are in bankruptcy? Can you retain key employees to assist in the turnaround? Will there be sufficient cash flow to continue as a going concern and pay bankruptcy costs?
This process can be emotionally draining and costly, but is necessary if the company is to survive. The ultimate goals are for the company’s operating performance to turnaround and have the bank retain you as a client.
Using Working Capital to Complement a Current Bank Line of Credit
By: Toby Dahm, Senior Vice President, Hennessey Capital
Before Reese’s Peanut Butter Cups became one of our favorite Halloween treats, nobody thought that peanut butter and chocolate could be combined to become something so delicious. In the finance world, there is an often overlooked recipe for growth financing that creates a win/win/win scenario. That recipe is to utilize factoring as an incremental financing tool in addition to an existing bank loan.
Hennessey Capital has utilized this strategy to propel many companies to a higher level of revenue and profitability, while enabling the client to maintain a very competitive financing cost structure. For most small and middle market companies, a bank loan provides the lowest cost financing that they have access to. However, it is common that a bank is comfortable at a certain level of exposure to a client, but the client’s growth trajectory creates a financing need that exceeds the bank’s comfort level. This is where factoring can be the perfect tool to fill in the funding gap and enable the client to achieve success.
The benefit is that the client can very quickly put the factoring facility in place to complement the bank loan at very little fixed cost. The factoring facility becomes a tool to finance their working capital needs as their growth accelerates.. By providing up to 85% financing of accounts receivable, without diluting any equity ownership, the factoring facility enables the client to access cash immediately, instead of waiting for their customers to issue payment. Factoring provides great flexibility to the client by being able to finance the rapid growth when it is needed, while providing the choice to terminate the program when it is no longer needed due to expansion of the bank loan or a reduction in working capital growth.
An IT staffing company was able to utilize this program to take on additional work that enabled them to grow from $2 million in annual revenue to over $10 million during an 18-month period. Although Hennessey’s factoring facility was replaced by an expanded bank loan, the client has continued to grow at a strong pace and is now achieving annual revenue that exceeds $100 million. Another IT consulting firm utilized a factoring facility with Hennessey Capital to enable it to expand its base of consultants on one project from 10 employees to 75 employees over a 90-day period. As they demonstrated their performance and profitability on this project, their bank agreed to increase their financing to replace the factoring facility.
Just as chocolate and peanut butter can be combined, a bank line and a factoring facility can also be combined to form a very healthy 3 way partnership between the bank, the client and the factor.
Where To Turn When Your Bank Credit Line Shrinks, Part 1: Asset Based Lending
In today’s credit crunch, many business owners are having a tough time finding as many options for needed capital as they once did. The latest topic of the show is “Where to turn when your bank’s credit line shrinks.” This is part one of two, and covers asset based lending.
During this discussion, our interviewer rejoins Mike Semanco, the president of Hennessey Capital.
In the first part of the show, Mike explains what the credit crunch is, and how it affects your business. Mr. Semanco goes on to explain what asset based lending is, and how it can help business owners. This episode is wrapped up with a discussion on other options for financing, in case asset based financing is not the best option for you. Overall, business owners should hopefully find this discussion very informative and helpful.
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