The Credit Conundrum

We’ve seen a rebirth of lending but credit is still not easily obtained, especially for small and middle mkt cos

As the temperature warms up and spring begins to bloom, credit markets seem to be undergoing a similar renewal. In the past year, we’ve seen a rebirth of lending but credit is still not easily obtained, especially for small and middle market companies.

Why? The recession significantly impacted corporate earnings, and many companies were forced to lower prices and draw down available operating cash flow and credit. These leaner companies often have their credit risk concentrated among a smaller group of customers and may also have diminished capabilities to mitigate risk. Auditors are naturally wary of offering companies clean audit opinions before extending credit.

Carpe Diem! Seize Current Opportunities
Although credit is difficult to obtain opportunities do exist, but timing is crucial – begin now to gain lenders’ trust and move forward.

Build your case.
Prepare an analysis that separates your “run rate” from the “one time” setbacks you experienced in the recession. You may not be able to treat your setbacks as non-operating losses, but be sure to acknowledge them to lenders and make the case that your business is improving.

Show your lessons learned.
Demonstrate how you have adapted your business model and developed solutions. Establish low-cost credit management tools, such as credit insurance and inventory management solutions, to reduce risk and increase lenders’ confidence.

Restore key financial leadership.
Use flexible interim CFO resources or interim executive consultants to stabilize finance, accounting, analysis and credit and collection skills. This will show lenders that you have the ongoing capacity to meet your goals.

Establish a Rolling Financial Forecast Model.
Such a model illustrates your company’s ability to endure tight corporate liquidity and maintain required covenants. If your accounting department cannot support this model, retain a firm that can construct and maintain one for you.

Write a compelling story.
Lenders must document their reasoning for extending or renewing credit and present it to their respective creditor committees. Write that financial reporting story for your lender so he or she can quickly access that information and understand how your data is supported.

Consider alternate sources of working capital financing.
Your company may qualify for mezzanine (2^nd lien) working capital. You might also consider unitranche financing, small high yield financing or convertible securities or bond offerings.

Chances are, you’ve made significant cutbacks to become a leaner organization following the recession. As the economy recovers, you must reinvest or risk getting surpassed by your competitors. Now is the time to chart a path toward growth – don’t take “no” for an answer!