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Step 9 in Avoiding Bankruptcy – Identify Funding Sources in Advance of Need

There is an old adage that banks will lend money to companies that do not need the money.

The KGI System™ stresses the importance of fully understanding and engaging the sources of capital and the characteristics of their lending well in advance of need.

There is much that the Chief Executive Officer and Chief Financial Officer can do in advance. They can identify the right financing sources and personally connect with the decision makers, create a Business Plan that is suitable for each source, and determine and prepare the best deal structure for each source.

The Company in Need
A couple of years ago we were helping a $75M computer accessories manufacturer that was in financial difficulty. Prior to our involvement, the company prepared a plan and shared it with their conventional bank. Unfortunately, it was pretty clear that the company would run out of cash many months prior to recovering. The bank was unwilling to extend credit because the company would not meet the key ratio requirements and because prior plans had not been met. Credibility had eroded, perhaps beyond repair.

We helped the company drive some operational changes, revised the plan, and introduced them to some suitable asset-based lenders (ABL). The solution was an ABL structure for the interim problem period which provided the lender adequate collateral coverage.

The company survived and is now thriving and has, once again, secured a term loan from a conventional bank.

A Step Back
When a business is in crisis there is little time to think, develop, and execute a plan. Some of the financing sources will have dried up. It is a bad time to try to establish relationships with these sources, and therefore, you will be uninformed related to suitable sources and deal structures.

At a time when companies need greater flexibility, lenders, institutional investors, and other members of the financial community have become extremely conservative and restrictive. In addition, asset and enterprise valuations have decreased, confidence in cash flows has waned, insurance premiums have skyrocketed, and capital sources have intensified their scrutiny of companies. The combined dynamics of these trends are creating a variety of liquidity issues for many companies. This liquidity crisis is having a strong impact on operations, shareholder value, and morale, and is likely to continue doing so for the foreseeable future.

Major Activities
In the end, it all comes to this key question: Given current market conditions, how can the CEO and company create short- and long-term liquidity?

  • Identify the right financing sources. Who are the traditional sources for a given transaction? Will they be cost-effective or even participate, considering the state of the company or industry? What are the innovative alternatives that will work? Who are the opportunists best suited to support these alternatives?

    We’ve included a chart below to help owners and executives better identify the right financing sources for their business needs.

    The point here is that you don’t want to be a stranger in a time of need.


  • Connect with the decision makers. To complete aggressive or unconventional transactions, senior executives at capital sources must be involved, but they are often inundated, making it hard to catch their attention. As a result, many companies initiate what appear to be favorable discussions with financing sources only to discover, weeks later, that the financing is not available or too expensive. By maintaining trusted, active relationships with key executives at each institution your transactions are properly evaluated, responded to quickly and fairly negotiated.

    Here is an exercise you may want to consider. Once the right sources have been identified, get the name of the decision-maker for each source. Meet with that individual while your business is doing well, and get to know them personally, such as the learning about their spouse and children or any personal interests they have. Then, make a point to send periodically send informative notes, meet for lunch or send birthday cards to stay connected.


  • Create a well thought out business plan. Presenting a business and financial plan that articulates the financing needs in both the short-and long-term is critical and can turn your enterprise value into a bankable asset. Assumptions and strategies to build enterprise value must be believable and compelling. For example, key assumptions like annual rates of revenue growth should be supported by historical, economic, industry, or competitive data.

    In an unsettled market, it is also helpful to outline contingent strategies to protect the loan or investment should things not go as planned. When you establish minimum enterprise value, it can become a bankable asset.


  • Create the right deal structures. Today, there are few, if any, conventional solutions for companies seeking the “best” transactions. You must create multiple structures for any given financing. It is important to gauge the trade-off among structure, size, covenants, and price carefully. Instead of settling on one solution, it is essential to be flexible until the best solution is negotiated with the right capital partner(s).

Some of the capital sources and their characteristics:

ceo-chart

Going with Plan B
Moving forward and preparing the Major Activities listed above will help ensure survival and save considerable aggravation. Let’s say, however, that you did not prepare in advance of need. Fortunately, there are firms who know the right financing sources, are connected to the decision-makers, and understand the kind of business plan and deal structure required to have a successful transaction. The right firms have been for decades and have established credibility with the financing sources – the all-important difference between additional liquidity and a cash shortage. .

Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.