Middle-market borrowers are being asked to provide lenders updated budgets, projections and cash flow forecasts. And because of Covid-related shutdowns, these borrowers are not sure where to begin. Lenders are trying to figure out whether borrowers will have sufficient borrowing capacity and availability of funds to support both continuing operations and the ability to ramp up operations. In many cases, borrowers have taken significant operating losses and now are now sitting on excess inventory because of cancelled orders and returns.
Many companies now need additional working capital to support raw materials and labor for new orders. This is not business as usual and requires additional steps, support, and documentation to get the lenders’ support where feasible.
1. Communicate with your lender to prevent surprises – in either direction. The biggest mistake made by borrowers is not communicating with lenders and providing current information. Stay in regular contact with customers and build a proper sales funnel and backlog report that can be explained to the lender and is supported by customer purchase orders and best expectations of customer orders.Stay in regular contact with customers and build a proper sales funnel and backlog report that can be explained to the lender and is supported by customer purchase orders and best expectations of customer orders.
2. Communicate with suppliers and trade creditors to get help. Your lender does not want to be alone in making adjustments to support your business’s financial needs, Talk to suppliers about their ability to deliver goods and, as needed, structure a payment plan to facilitate deliveries. Prepare a detailed schedule of how vendors will get paid, even if over an extended period. Getting cooperation from your suppliers helps the lender support needed temporary adjustments.
3. Sell through excess inventory and move beyond the impact on financial statements. A well-documented budget will allow the lender to provide a temporary or seasonal over-advance. Borrowers need liquidity now and waiting only puts the company at more risk.
4. Build a budget that works. Incorporate cost reduction and critical significant adjustments to the business model. A reduction in force (RIF) may be the hardest activity a CEO or owner has to undertake in their business life. But not taking direct and immediate action preserves the business and jobs for many more employees. Now is the time to drop marginal product lines and unprofitable customer relationships. Document and be prepared to explain in detail the impact of the adjustments to your lender.
5. Treat your lender as a business partner. A good lender will often ask tough questions but provide useful guidance. Your lender should be kept in the loop as to developments within your business during Covid-19. Communicating with your lender regarding your current status and providing information as to your financial situation and steps you are taking to improve conditions goes a long way to keeping your lender satisfied.
EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance, and Insolvency. For more information, visit: http://www.ema-group.com