Author: Chris Risey, President, Lantern Capital Advisors, Atlanta
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Let’s be clear the financial shake-up appears far from over. Talking with investors, business owners, bankers and other finance professionals, the headlines only tap the surface of what’s actually happening in the capital markets. Lending parameters available just a few months ago are being scaled back. Companies believing they have adequate liquidity are getting caught short. As more companies seek to take down lines or proactively shelter themselves from future risks, the problem is likely to only get worse.
For business owners and CFOs needing added capital, it pays handsomely to think ahead. The best way to do that is understand your financing needs, articulate that to numerous funding sources, adjust based on their feedback, and then select and vet the best solutions for your company. As suggested by our Fast Track methodology, companies can assess their financing options and make informed choices about other financing alternatives within a period of a month and look to have financing in place in as little as 60 days. The key is being prepared, thinking ahead and have access to numerous possible funding sources.
STEP ONE: Understand the problem and the risks – The real risk in today’s credit market is less that your loan will be called and more that the future capital you were expecting (and even paid for) may not be there. Not having access to even small amounts of capital can jeopardize your business and create frustrating interruptions.
STEP TWO: Identify your specific financing needs– Given the risks, it’s critical companies accurately identify their future financing needs. The best way to do that is create detailed financial statement projections. Detailed financial projections should include monthly or quarterly income statements, balance sheets and cash flow statements for a period of three to five years, with five years being ideal. (Five years is important because most subordinated investors price their warrants off the fifth year. If you don’t give them the projections, they will calculate their own projections, and their projections are never as high as your own.) If this work seems daunting, hire a firm to help you on an outsourced basis. Firms with experience, like ours, can often complete this work much faster than accountants or internal personnel. While the temptation is to create summarized financials, detailed statements are a superior format because they also give the clearest picture of the financing need and provide institutions an opportunity to offer the best terms for your situation. Better financing terms may mean higher advance rates on debt, or valuable over-advance features during upcoming seasonal periods.
STEP THREE: Entertain other lenders – Not all financial institutions are struggling. While some are looking to cut their losses or scale back, many institutions are picking up market share. The trick is to talk to lots of groups and play the numbers. In these shaky markets, the institution’s own internal ‘story’ is a bigger driver of your loan process than is your company’s story.
STEP FOUR: Consider non-bank sources for financing – Right now many new financings are getting done by non-bank financing institutions, such as hedge funds, subordinated debt funds, insurance companies, etc. These funds have already raised their needed capital and many of them are filling the void of the traditional lender. As the market improves, both the company and the institutions expect that their loans will be reduced with cheaper forms of capital.
STEP FIVE: Give the prospective financing sources more information - Once receiving proposals and before committing to a bank or financial institution, allow as many as three or four prospective sources of capital to review detailed information and start some limited due diligence. This is often accomplished by setting up a data room with files that show information commonly requested by financing institutions. By advancing discussions beyond the initial term sheets (i.e. proposals), both the company and the prospective financing institutions are able to further assess one another and avoid future surprises or let downs. Equally important, this step shortens the overall due diligence period, because sticking points can be dealt with while the company is making its final decision or deciding whether it needs a new financing institution.
STEP SIX: Be a contrarian: Look for new opportunities to create value – Just like when the stock market is down, now is the time to be a buyer if you have the capability. The market always turns around and most will look back and acknowledge those that went after new opportunities realized the benefits for years to come. Initiatives that commonly build value in a down market include acquisitions, buyouts and even growth. (Consider Bank of America buying Merrill Lynch.)
Following these steps, CFOs and business owners can make decisive moves to take the future of their business and value into their own hands, and possibly create much greater value for years to come.
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