There’s an old military saying that holds true in business: “No plan survives contact with the enemy.” Regardless of how carefully and well-thought-out your business plan, things can always go wrong. If we’ve learned anything from 2020 and the worldwide pandemic, it is that best-laid plans can still go awry.
For many businesses, this can mean restructuring, buy-outs or even closing their doors for good. No entrepreneur wants to shut down a business that didn’t have a chance to thrive in the hostile environment of a pandemic economy, but sometimes that’s the reality.
But there are alternatives to closing up “shop” and trying again.
Many businesses in distress can rebound and grow again with a fresh infusion of funding and some reorganization. How do you obtain funding for a distressed business? Here’s an overview of the process and a few tips on when it’s time to pull up stakes and move on to the next project.
Method 1: Consolidate Debts With a Short Term Loan
How Short Term Loans Work
Retailers, medical practices, auto shops and other brick-and-mortar service providers find short-term loans as a source of turnaround funding. Provided they have sufficient credit, business owners find they can maintain operations until they finish reorganizing and restructuring their business.
Why Choose Consolidation?
The purpose of consolidation funding is to eliminate higher interest payments and outstanding debts with a single monthly payment. Consolidation provides the financial breathing room to keep doors open, make payroll and restructure the budget to generate more revenue.
One caveat about financing for consolidation: it is unwise to stack merchant advances if your business continues to generate insufficient revenue. Using multiple advances to pay off other advances will keep your business operating short-term, but it inevitably spells certain failure. Taking merchant advances without restructuring and developing a new revenue plan is only effective if you can ensure steady new business. In short, if you can’t find a way to increase revenue and pay back the advance, you’re sunk.
Method 2: Debt Restructuring
Debt is an unfortunate necessity of any business venture. Not carrying any debt can actually count against you when it comes to getting financing to expand your business. Unfortunately, sometimes economic conditions demand that a business take on additional debt. The revenue to make payments or eliminate that debt may start rolling in without delay. That isn’t always the case, though.
The Problem Of Overwhelming Debt
Some businesses eventually take on so much debt that their revenue will not support consolidating their debts with a loan. Many business owners in this position see their only solution as a Chapter 11 bankruptcy. Fortunately, there are still other options available.
Restructuring Debt For A Turnaround
The first step to restructuring without a consolidation loan is to open negotiations with creditors. It may seem counterintuitive, but creditors are highly motivated to work with any distressed business on terms. When a business files Chapter 11, they will recover only a very small percentage of any debts outstanding. It is always in their best interest to help you restructure and recover. Consulting with a professional debt negotiation service or engaging them to work on your behalf is best. Debt specialists understand the world of finance, and they can assist you in obtaining the best terms. Talk with your loan broker. As experts in the business we can assist or refer you to a credible debt specialist.
The primary prerequisite for renegotiating debts is that a business cannot have filed for Chapter 11 bankruptcy. Additionally, your business must be able to provide evidence of continuing revenue or contracts that will produce sufficient revenue. It is also crucial that you have a full list of all creditors, balances owed, and current payment amounts. Restructuring debts can often free up enough revenue to fund a turnaround and get on a better financial footing.
Method 3: Debtor-In-Possession Financing
There Are Always More Options
This final method is for businesses that no longer have the option of debt consolidation or restructuring. There’s no reason to throw in the towel just yet, though. Even businesses in Chapter 11 bankruptcy protection can fund a turnaround at this point. Applying for a Debtor-In-Possession (DIP) financing can offer a path back to profitability.
Why Choose Debtor-In-Possession Financing?
DIP financing for a turnaround is defined by a scenario where management and directors remain in possession of the business even after filing Chapter 11. Certain creditors offer loans to finance turnarounds at these businesses. How do they benefit? U.S. bankruptcy law offers special protection to DIP creditors, and they are given first priority over all other lenders in proceedings. If a borrower defaults on the law as part of their bankruptcy, the creditor knows they will be repaid first. Moreover, they stand to recover significantly more than other creditors.
How DIP Financing Works
To obtain DIP financing, a business must have already filed for Chapter 11 Bankruptcy. Next, they must find a lender that specializes in Chapter 11 DIP financing. Once you apply for and are approved for a DIP loan, the loan has to be approved by your existing creditors. Our loan brokers have included DIP financing firms in our network, and we can assist you in making a decision on what type of financing and which lenders are best for your business to pursue.
There is potential for other lenders to object to the loan if they believe that DIP financing will reduce their chances of being repaid. Finally, the bankruptcy court must approve the DIP loan, determine there is sufficient collateral, and approve both your budget and repayment schedule.
One significant benefit of obtaining a DIP loan is that if a business still fails to turn itself around, DIP lenders can help finance selling the company. After Chapter 11 and exhausting other options, DIP financing can often make the difference needed to “right the ship” and restore profitability.
Conclusion
The most important principle to keep in mind when financing a turnaround is you are never out of options. There are always ways to keep your business going and fund recovery. Moreover, all of the methods we’ve discussed here make it easier to sell your business if that seems like a more viable option. Are you running a distressed business in need of turnaround financing? Contact one of our loan brokers today to discover how we can help you make the best financial choices for your business.