Financing Growth Series – Part 1
Many businesses share a common risk in today’s market…access to capital. With lenders’ and investors’ appetites changing – new levels and expectations regarding risk and returns – many business owners and executives are left wondering “how do I finance my firm and who can I depend on?” In this series of Financing Growth articles being published over the next few issues, we will explore the current market trends and funding alternatives for emerging growth and middle-market businesses.
Let’s start with your bank. Most companies have some form of commercial bank credit, be it a line of credit, term loan, lease, etc… Commercial banks are primarily cash flow lenders using collateral as a backup source of repayment. So if your company is making less money than before or is struggling to be profitable, it is likely your banker is getting nervous. Just when you may need more capital and have a softening in your cash bank maybe trying to tighten your credit limit or worse call your loan. A proactive way to address the capital structure of your company is to look at your likely cash flow in the next one to two years and determine the overall needs (how much, what for, and when). It may be that you can refinance a various portions of your balance sheet with lenders that specialize in the supporting assets.
For example – If your company has fixed assets that have been paid for with your line of credit, you may consider refinancing them with term debt or a lease. Even if you didn’t recently pay for them with line, you may considered a sale-leaseback of real estate or existing fixed assets to free some of the cash invested in these assets. Either of these techniques can be used to free the demand on your line of credit and easy pressure that you may be experiencing. Another alternative to a traditional line of credit is an asset based line which is more closely monitored by the lender….availability is directly tied to outstanding accounts receivables and inventory. A more expensive approach is factoring and purchase order financing.
We have found that the best solution begins with the end in mind…meaning that management revisits its overall strategy in building the company and takes a long-term view of its financing needs. Then backs into the current situation and how to correct or adapt to enable it to move forward.