Company turnaround financing: How to survive the sacrificial shutdown

Company turnaround financing: How to survive the sacrificial shutdown

To assume there are only a few intricacies in funding a business in a turnaround scenario is a serious miscalculation.

Companies in these situations have a variety of problems that range from being out of compliance or default with existing lenders to overdue trade payables, ATO taxes and missed sales opportunities.

What happens when the company has neither access to traditional financing or supplier credit to fulfill sales orders?

There are a few questions that need answering and only specialist funders and turnaround consultants can navigate such a turbulent time.

What steps has management taken to turn things around?

Are the business owners motivated enough to trade through the issues and do they have enough sales opportunities or existing assets in the business to pull them through?

Next, several critical points such as security issues and key business relationships must be sorted, the new funder or investment partner must be creative enough to execute on a workable structure that will protect them from many of the legacy risks that exist.

What are the opportunities while in turnaround?

An alternative form of investment-based financing such as purchase order financing (including production funding for manufacturers) is a lifeline for a business that still has viable sales orders to fulfil from creditworthy buyers.

Once the business owners can demonstrate a strong motivation to continue trading and have engaged an insolvency practitioner to manage creditors, funders will work to pull a company through to solvency.

How to solve the funding paradigm shift?

Profit before history – Does management have enough profit built into sales to warrant trading through and can these new profits service the obligations during the turnaround.

Existing lenders? – If there are existing lenders, will they accept a payout or carve out security for the new funding? Is there enough assets to pay out the lender if cooperation cannot be met. Receivables or property assets can be utilised in this scenario to quickly meet existing lender obligations to free-up security.

Can other assets quickly cover immediate working capital? – Structured financiers can quickly lend against existing assets such as property, receivables or equipment to satisfy immediate capital needs. Short-term capital is commonly used to cover wages, rent and other fixed costs that are critical to the trading entity.

Only experienced funders can structure a facility that works for the business owner, insolvency practitioners obligations and the lender risk.

Is cash generated from new lending enough to support the current structure? – Where pressures are too high from creditors or funding cannot meet obligations, can the new lender support a new structure while satisfying existing obligations of the old entity? In these scenarios, customer relationships are critical to allow orders or contracts to be reassigned.

Customer relationships and legalities – In a turnaround it’s a priority of the purchase order financier to ensure relationships are in good standing. If customers are aware of financial issues, outstanding receivables can be withheld or significant setoffs can be deducted from payments. Future business can be affected if the customers are not confident that isn’t sufficient support from new funding to make good on orders.

Investment-based funders that support a turnaround can be the lifeboat needed to trade through stressful headwinds.

If a business can demonstrate the ability to secure orders, trade and make money if provided with the correct capital structure, all that’s left is a swift conversation with the funder.

See if Stak can support you through a turnaround

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We regularly share our thoughts on trade finance, lending, company culture, product strategy and design.

Stak works with clients that sell to some of the largest buyers in Australia & overseas.

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