Getting asked by your bank to find a new lender is happening a lot right now. It’s not personal. You have taken some losses and maybe invested more capital or provided supplemental collateral to boost your availability under your credit facility. You have explained the recent losses caused by the Covid-19 shutdown to the bank and everybody else seems to be getting a reasonable forbearance. So why is the bank picking on you? Well, it can be for any number of reasons that have nothing to do with the nature of your long-term relationship.
Suffice it say, banks often do not have much latitude once a default occurs and certain other measurement conditions exist either related to your business or the bank’s portfolio. So, when your bank does ask, be gracious, as you may need the bank’s help with additional time or a temporary over-advance. A good banker will also give you some guidance about what you need to do to get refinanced and even give you some direction or options to help with the refinancing.
Actions to take when your business needs refinancing:
1. Get referrals on non-bank lenders from trusted sources. There are a lot of non-bank lenders with varying objectives that may align with your business needs. That non-bank lenders do not have the same regulatory requirements as banks cuts both ways. These lenders can provide you a lot more credit availability but can also have tripwire covenants that will cost you a lot of money.
2. Prepare a comprehensive restructuring plan that ties to a detailed budget model. The bank asked you to find a new lender for a good reason. Be introspective and recognize that something fundamental needs to change with the business. The goal is getting to a level of profitability that can support your debt levels. If you have too much debt, sell off non-performing or non-core assets whether inventory, equipment, real estate, an unprofitable business line/division, the company airplane. Maybe it’s time to find a financial partner or prepare the whole business for sale. Take the dramatic action needed and show you will be able to meet your plan milestones and objectives.
3. Prepare a detailed cash flow forecast that covers the next 90 to 180 days. A new lender wants to make sure you can get to a closing. Keep in mind that the new lender may want you to have a pay-down plan for vendors that are getting stretched. A good lender will want to make sure you are properly capitalized.
4. Prepare a financing plan. You need to explain what happened to the business and how the actions taken will get your business to targeted business plan objectives. This may sound odd, but you will need to succinctly explain how your business makes money. You would be surprised how many business owners and CEOs of investor-owned businesses will say that they just need to generate more revenue. It is not enough.
5. Access collateral condition. Preparing a detailed cash flow forecast will provide you with an immediate assessment of how much time you have and how much additional money your business requires. Review your business assets. For example, conduct a detailed review of accounts receivables and inventory to determine the lendable condition of each. If there are aged receivables or inventory, develop a plan to convert these into cash.
6. Consider outside help. Putting together a comprehensive “package” to propose to a lender may take some time. Because you are also managing the day-to-day business, you may require a consultant to manage these “extra” activities. Furthermore, a consultant with experience in refinancing may be able to facilitate the process in a more expeditious manner that is beneficial to the company and the lender.
In an uncertain business environment, it is best to be prepared for the possibility of a “You need to find a new lender” call. If or when that call does come, taking the steps above can lessen anxiety, streamline the refinancing process and create less disruption in your business.
EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: http://www.ema-group.com.