Consider your financing options

Excerpt reprinted with permission from The Credit Crunch: a Practical Guide, Grant Thornton LLP, 2008


What’s the issue?
What happens if you’re having issues with your bank? This can result in a severe restriction in your borrowing capacity, or worse, pulling your financing facilities all together. With what’s happened in the financing environment, it’s not as easy as it used to be to simply secure an alternative source of capital.

What can you do?
Make sure you understand all your options for funding your business. Start with your current lender and consider alternative ways of structuring your current credit facility (e.g., term debt versus line-of-credit). Understand default provisions in your current borrowing agreements. Based on your size and location, understand who alternative lenders might be for your business. Also consider other types of secured financing sources like leasing, asset-based lenders and factoring companies. In some locations, government-supported financing programs might be available.
Other types of outside financing include subordinated debt, private equity and venture capital. These funding sources are generally longer in duration and often take more time to arrange. If you have enough time and flexibility, these sources can help improve your capital structure over a longer period of time.

Finally, don’t forget about creative ways of accessing cash that might be tied up in the business. As discussed earlier, shortening your working capital cycle should be your first priority. Look at negotiating payments on long overdue accounts receivable or obtain financing through your trade vendors. Consider the sale of non-core assets or subsidiary businesses. Consider sale lease-backs on real estate to generate cash. In some industries, you might be able to ask for and receive advance or progress payments from your customers.

What to avoid?
Do not automatically assume that your current lending relationships are going to stay in place. Avoid being in the position of not understanding your alternatives if you are forced to end your relationship with your bank, lender or other investors. Court other sources of capital, just in case. Don’t be left without a contingency plan.