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7 Events That Should Trigger the Search for Capital

By Rocky Gor

It takes significant time and effort to:

  • Find the right lending partner 
  • Obtain the right amount
  • Achieve the right deal economics 
  • Close within the right time frame

Today’s CFOs are busier than ever, they need an event driven process to make sure they initiate the search for capital with sufficient time to achieve their objectives.

Why it matters:  Usually stable and predictable bank loan markets are experiencing ripples due to the uncertainties of the real economy. Middle-market CFOs are likely to find themselves spending a lot of time and effort with a lender that can’t deliver exactly what they need.  Suboptimal outcomes and last minute unpleasant surprises can be avoided by implementing event driven triggers to initiate a diverse capital search. 

7 Event Triggers

The following key events should become an integral part of the financial decision making process and automatically prompt the search for capital. 

1. The 18 Month Mark  Whether debt is maturing within the next 18 months or financed more than 18 months ago, now is a good time to improve the deal through refinancing, extension or some negotiations with your lender.

  • Debt maturing within 12 months is classified as short term debt, which can affect credit profile and liquidity ratios relevant for your vendors and customers. Refinance or extend maturity well before the 12-month mark, which means start the process at least 18 months in advance.
  • Your company has evolved in the last 18 months, and so have the debt markets. If your debt is 18 months or older, is it still “market”?
  • Check the market for your credit to keep your lender honest. For debt with prepayment fees, be armed with refinancing options and ask for a fee waiver during the last year of the penalty phase. 
  • Can your current lender address your needs 18 months from now? Would they hit their credit limit or would their credit preferences change? Have your options ready before you discover your lender’s limitations.

Customer concentration is a double-edged sword.

2. A Customer Starts Contributing 10% Or More Of Your Revenues Surely, your lender is excited to see your growth. But, customer concentration is a double-edged sword for them, which becomes sharper as the concentration grows. Beyond 10%, customer concentration can become a driver for many credit decisions. 

  • What is acceptable customer concentration for your lender? Would they restrict your access to additional capital if customer concentration grows?
  • Can you find other lenders more tolerant of higher customer concentration due to their industry experience or higher risk appetite? 

Have options ready for refinancing or growth, just in case your existing lender cannot deliver what you need.

3. Creating A List of Acquisition Targets Know your debt capacity for acquisitions in advance to compete confidently for a coveted target, ignore it to yield control to competitors and advisors. Answer the following questions before you make a list of targets to pursue. 

  • How much equity do you really want to use for that acquisition? 
  • What type of acquisition targets can improve or diminish your debt capacity and how? 
  • Considering your current financial situation, how much more capital can you obtain, under what structure and cost, from what type of lenders and within what time frame? 

4. Amendment, Extension or Renewal of Your Existing Loans This is obvious for any savvy CFO – it is important to know what you can get in the broader market before you ask for something from your existing lender. Keep them honest by getting your Plan B ready.

Are you going to be too big for your current lender in 18 months?

5. Executing Sales Contract or Order That Can Supercharge Your Growth  If that big sales contract requires expansion of capacity, new machines or buildings, you should think through the ways of financing it before making a commitment to such an important customer. 

  • Would your lender buy into the promise of a new revenue stream and finance your expansion? If yes, what is your debt capacity – how much financing can you get from your existing lender? 
  • Are you going to be too big for your current lender in 18 months? Can they provide ancillary services you may need to support your growth?
  • Would customer concentration be an issue? Are there other lenders with better solutions? How quickly can they provide capital?

6. Making Your Capex Budget This one seems obvious but it is often missed in the rush of growth-minded thinking.  Past financial performance weighs heavily on your lender’s credit decisions. But, capital expenditures require prediction of the timing and amount of return on invested capital, which makes risk analysis inherently speculative and credit decisions riskier.  For any meaningful capex project, assume that it will take longer to secure debt capital, especially for large project finance needs of complicated plant, machinery and IT systems or large real estate projects.

7. Liquidity Approaches Next 18 Months’ Cash Requirements Every business goes through its cycle. The ones that manage the cycle with capital cushion come out better at the other end.   Few lenders will take the credit risk when the company does not have sufficient liquidity (sum of cash, cash generated by operations and borrowing capacity) to cover the next 12-18 months of cash needs. Depending on the financial situation and risk appetite of your current lender, you might need to find alternatives. Ideally, the search should start when the liquidity drops to around 18 months of cash needs and no less.

It never hurts to know your debt capacity.

Overall, it never hurts to know your debt capacity under the same debt structure as you have today, as well as other structures that you have not considered before, even in the absence of any of the trigger events.   The debt capital markets have evolved substantially since 2008. In addition to hundreds of banks offering conventional C&I loans, there are hundreds of private or non-bank lenders offering innovative debt products. You may have access to financing alternatives that can stretch your debt capacity beyond what your current lenders have provided, including the possibility of replacing expensive equity capital with cost-effective debt structures. We have designed CAPX to enable you to instantly discover viable capital structures, relevant debt capacity and matching lenders to quickly obtain $5MM – $100MM+ in capital from lenders beyond your network. Schedule a call with us to learn more about CAPX and how it can help you reach beyond your limited options, free of risk or obligation.