Turnaround Finance – Solution by Vultures or Angels?

An injection of turnaround finance involves saving a potentially insolvent company from irreversible insolvency and returning the company to a stable financial and operational position. The objective is to achieve this whilst maximising creditors’ interests and the interests of employees, managers and shareholders. Popularised by such media productions as Dragon’s Den (starting in Japan, now exported to the USA and UK), private wealth may be granted where the investor believes there is a future for the business. This article deals with turnaround finance for both under-performing businesses and businesses that are either insolvent or potentially insolvent.

The Progress Path

Turnarounds are achieved by a combination of financial, crisis management, restructuring and insolvency skills. The first step is to determine why the company is in the state it is. Realistically, is there anything that can be done to reverse the trend. Analysis is the key to really get into the problem. The analysis will resemble the three legged stool approach. The ‘legs’ vary, but essentially the analysis will get into these three areas: possibilities for restructure, viability and management

Restructure

Even a formal restructure involving insolvency doesn’t have to conclude the company. Many companies have found that this experience has forced a re-think of the company mission and a focus of action. But the majority of turnaround finance initiatives result in informal restructuring which is generally better for creditors, customers, employees, banks and shareholders. The restructure may necessitate job loss and lean arrangements with creditors. It may involve closing some facilities to reduce overhead or consolidating divisions to eliminate duplicate administrative functions. It might be necessary to sell off underperforming divisions of the company and outsource some functions to other parts of the world with less expensive labour rates. Viability This is the ‘leg’ that varies, sometimes it’s in the guise of the finance package. But whatever finance is required, whatever the state of the company and it’s creditors – is the company viable? Does it have a sustainable market? Does it have a future for it’s goods or services? If it’s a new business in something like internet technology, the answer to this question may not be straightforward and need significant analysis and business instinct. For older industries the past history of similar ideas will help greatly.

Management

Of all issues involved in the turnaround, the most difficult is getting the company to recognise deficiencies in management. Weaker members of the management team need to be replaced and this is very difficult for the board to be objective about. The management of any company do not want to know that their company is struggling because of the obvious implication of where decisions are made resulting in the problem. Many management teams won’t accept that they need help until the last moment – but the best help is the help administered early. The resulting action may have to be decisive and definite, a.k.a brutal. ConclusionThe most famous example of a turnaround success is Canary Wharf in London that had serious financial problems but is now one of the major world financial centres. Sadly this example involved formal restructuring which meant insolvency, then to rise from the ashes. Most companies can avoid this by excellent services of turnaround finance companies. These entities can rise to be major players in their market and can thank the time when they had to call in extra experience along with their turnaround finance.

How to Secure New Financing From Alternative Lenders to Eliminate Working Capital Constraints

Securing traditional financing through banks and other financial organizations remains highly challenging for many businesses. As banks pull back more traditional commercial-and-industrial lending, they are often unable to lend even to small businesses with solid financials. And as their security demands increase, some companies are pushed into distress or unable to take advantage of commercial growth opportunities.

If your company is performing well, you may sill find it difficult to secure sufficient growth capital from your current lender- even though you are growing according to projections. Refinancing a previous line of credit can help support your company’s continued domestic and international growth, especially if your company is stuck in a credit facility that was put in place when your performance was not as strong. Your previous small business loan may have been appropriate at the time, but after a couple years, the pricing may no longer be appropriate for current performance.

It’s a real sign of the times when banks stop or restrict advances against inventory due to internal changes or re-organization. For example, it’s common for lenders to deleverage the inventory financing available to a company and restrict additional funds – even if a company’s numbers are growing.

So what do you do if you’re doing great, but your bank isn’t?

When a bank makes their problems your problem, your business can fall victim to high pricing and/or reduced growth capital due to circumstances at the bank that have nothing to do with your own company’s performance.

In order to capitalize on upcoming commercial growth opportunities, businesses need financing that is affordable and intelligently structured. It is important to look for a lender that recognizes this and is able to refinance your line of credit and increase borrowing availability to support your company’s continued growth.

An experienced alternative lender can secure a credit facility that serves to refinance your previous line of credit. In addition to helping you solve any funding problems created by the bank, an alternative lender may also find it appropriate to work with affiliates to successfully structure and arrange an optimal financing arrangement.

Do Canadian Banks Provide Equipment Loans and Lease Financing?

The leasing industry in Canada has historically been dominated by a number of different types of entities that provide equipment and lease financing to Canadian business.

The types of firms that are the key players in lease financing in Canada can be broken down into the following categories:

Life Insurance Companies

Credit Union leasing firms

Third party Independent Finance Companies – Canadian owner

Third party Independent Finance Companies – Subsidiaries of American firms

Captive Leasing Companies

Bank Leasing entities – Subsidiaries of divisions of Canadian banks

We would venture to say that probably 90% of Canadian business owners and financing managers think of ‘ Third Party Independent Finance Companies ‘ when they are looking to source lease financing for their equipment and capital expenditure needs.

Canadian chartered banks have moved in an out of the Canadian lease financing industry over the years. Currently only two the Big 6 Canadian banks have full fledged separate lease entities that actively market lease financing to their customers. In our opinion the reasons customers choose a bank lease financing entity are as follows;

Pricing

Existence of a Current Banking Relationship

Dollar size of transaction

Let’s elaborate a bit on those points. Because banks are in the position of having the lowest cost of capital in Canada for business financing rates on bank leasing deals tend to be excellent. On average we would observe that rates on larger deals tend to be 3-4% over the Canadian prime rate. This is excellent pricing, as independent firms tend to price at 4 to 5 to 6% over the Canadian prime rate. That is on average of course because every customer’s credit quality and situation is unique.

Business customers have bank lines and term loan arrangements with their bank. So it is a natural logical extension that they would discuss their needs with their banker, who may, or may not be able to offer a lease financing solution. We indicated that only two of Canada’s chartered banks have full fledged lease entities. Some of the other banks have leasing division, which are much smaller and more specialized in size, and some banks choose to ‘ partner ‘ with third party independent finance firms that are both Canadian or U.S.owned.

We also referenced dollar size as a key factor in a customer choosing a banking lease arrangement. Banks in Canada have virtually unlimited capital, so they certainly can choose to finance any amount they choose.We say unlimited capital, that is a bit of an exaggeration but Canadian banks are currently viewed as some of the strongest in the world re their own credit ratings and capital ratios.

Banks are traditionally a bit slower to enter into the lease financing area, and banks use the function in some respects to develop new corporate banking relationships. In fact we have observed that in the 2009 and 2010 banking environment in Canada the bank lessor in fact attempt to develop a full corporate banking relationship with customers who approach them for lease financing needs.

Leasing is a good source of profit for the banks – the banks tend to make solid credit decisions on assets and corporate credit quality, and lease pricing provides some nice yields compare to some other parts of their business.

Some banks in Canada have, in the past, purchased some of the private independent Canadian lease companies that were getting large and successful or had a specialized market or geographical niche… Banks are often quick to sell portfolios and eliminate leasing divisions when they feel that market conditions suggest that.

In summary, the Canadian leasing landscape is made up of a number of market participants. Banks play a key role, but not a dominant role in the industry. Lease financing via a bank is often a relationship driven arrangement with the business customer’s current incumbent bank. Banks who participate in lease equipment financing have excellent rates but higher credit and asset requirements. Business owners are cautioned to source the assistance of an experienced leasing advisor to determine which leasing arrangement (bank or non-bank) is best for their needs.

What Are Some Risks and Issues Around My Company Setting Up a Customer Finance-Leasing Program?

Many firms benefit significantly from either setting up on their own or partnering with a third part to set up a customer financing program for their products. Key benefits are increased sales, cash flow, customer loyalty, etc.

But are there also some risks for the company to be aware of also – Of course there are and let’s look at some of those risks.

We would also point out that these risks are in fact the same ones taken on by independent leasing firms also.

Foremost from a risk perspective is that fact the customer financing program will be viewed by the customers as the one and same as your company. Therefore customer service and financing ability are in fact now part of your firm’s reputation.

Companies may also find that the borrowing costs to set up a program are in fact higher than their normal business operating costs. Naturally the method in which the finance division is set up also affects the debt levels of your company. No business wants to fail because it took on higher debt in an effort to in fact help their customers!

On a long term basis company lenders might view your firms foray into customer financing as an additional risk factor, which they might try to compensate on by imposing restrictions such as additional covenants, requests for more equity into the firm, etc. The bottom line is simply that setting up a customer financing scenario may in fact affect your own firm’s ability to borrow.

If your firm is larger then analysts and firms looking at your firm might in fact be raising issues and perceptions around which business you are actually in, i.e. your products, or the financing of those products. Business owners and financial managers will always want to ensure that ultimately they are sticking to their core business model and philosophies. If your firm becomes too enamored by financing you possibly run the risk of total business failure. There are numerous cases in financial history where firms collapsed because of the shenanigans of the finance division.

We have heard the term in business ‘sticking to our knitting’, which of course simply means that management needs unique skills to run a business, and those skills are different in financing. Owners and managers related to the customer financing division must have strong skills in financial sales, structuring, and credit… Naturally we are also inferring that additional skilled personnel ultimately must be hired.

No company every wants to look back in hindsight and say that if failed or stumbled because efforts and funds went into financing, as opposed to r&d, marketing, staff, and product growth. Do not let a customer finance program become an obstacle to your ultimate business success

Business owners should ensure that there is good communications between the main operating company and the customer financing division – clear goals and philosophies should be set out re the function of such a customer finance program.

In summary the benefits of offering financing to your customer are very obvious, and proven true by some of the largest and most successful companies in the world – but all you have to do is to do it right! Ensure your firm is aware of the risks and challenges and monitor your customer financing program on an ongoing basis to ensure you are not straying from your core business model.

The Finance Division – Figures Don’t Lie, Two Plus Two Equal Four

When it comes to the financial area of a business, figures don’t lie! In other words, half of the communication problems are eliminated by the simple fact that people are working with figures in finance and accounting departments. Two plus two equal four. You can’t misinterpret that! Well, may be verbally, but not on paper.

Just yesterday, I was talking to a “hyper” person on the phone. She talked fast, going from one issue to the other all in the same sentence. She gave me a fax number where to send some information. She gave it all in one breath without pause and continued on with another subject.

I had to ask her to slow down to give me a chance to write down the number, repeating the area code, then the next three digits, which she acknowledged to be correct, then I repeated half of the next four digits, pausing for her to give me the last two, which she did and which I repeated as I had heard it.

When I faxed the information, the fax did not go through. I called her again and it turned out I had the last two digits as 25 instead of 35. But, when I repeated “25″to her which I had written down, she said, “right”. So figures can be misinterpreted verbally.

But not the figures that are calculated by adding machines and computers. Like I said two plus two equal four, not five. So the communication problem is non-existent in financial figures. One can manipulate them but that’s done by humans, not calculating machines.

One of the biggest problems in small business is proper financial and business planning. In larger organizations, this is a normal part of the operation; usually companies have hired people who include this area of the business as part of their job. Because of the nature of the corporate beast, the financial institutions expect and demand this obligational necessity.

When I teach starting a small business, I’m always amazed at the amount of people who “dream” of starting a business but don’t give any thought to putting a business financial plan together. Then, half the class quits within the first few weeks as they see what they hadn’t thought about. They are disappointed at the need to start a business.

Only the serious ones stay on and appreciate what they learn through the exercise. Even if their dream may have to be delayed, they now have concrete figures to work on. They are the effective communicators of tomorrow. They are the ones who will succeed because of their continuous personal improvement, growth and self-discipline.

Once you have the financial figures on a projection, you can manipulate these numbers to fit your goals. If a hundred thousand dollars isn’t enough to start the type of business you’re thinking of, then you will have to figure out how to raise the money or cut back expenses.

In an existing business or corporation, the figures that spew out of the accounting software are telling you exactly where you’re at. Monitoring daily, weekly, monthly will give you the tool to take immediate action to change the totals of top and bottom lines and all the figures in-between./dmh