Especially for companies that have been around for awhile, there can be a build up of equity in their equipment that they aren’t or can’t utilize to bring additional cash into the business.
And there can be periods of time when there is a need to restructure short term debt by terming it out into longer term debt with a structured repayment schedule.
Down turns in business operations can see cash flow take a beating and short term liabilities such as accounts payable and government remittances go up.
In order for the business to continue into the future, there is going to need to be a plan to pay up these short term accounts so that trade creditors or government agencies don’t take collection actions against the business.
One of the most effective ways to do this is through equipment financing or equipment refinancing.
The challenge with this type of approach, however, is to get access to the potential borrowing power that exists in your equipment equity.
One of the problems that can arise with debt restructuring is that your senior lender has security over all your assets or most of the assets including the equipment. And while they may be very well secured with the build up of equity in assets held for security over time, they may not be willing to either lend you more money to consolidate short term debt, or are not prepared to release any of their security.
When this is the case, it may be necessary move to one or more different lenders to generate the incremental capital you’re looking for.
This may mean looking for an operating lender that can take accounts receivable and inventory for collateral and a term lender that can provide equipment financing against the equipment you own outright.
The reason you potentially look to more than one lender is to generate greater asset leverage.
Many times operating lenders will provide great leverage on accounts receivable and some leverage on inventory, but not sufficient leverage on equipment.
The result is that you are not extracting enough debt financing out of the equity you have invested in these assets.
So to get the amount of financing you require, you may have to get more focused in on lenders that finance certain types of assets and provide higher levels of leverage due to their comfort level in having the assets as security.
Typically higher leverage providers will require a sale and leaseback transaction to take place in order to further protect themselves against the risk of loss.
They can also be higher cost lenders than what you were previously dealing with.
But when you consider the cost of government arrears, or being cut off from trade credit and having to work from a cash basis, a slightly higher cost of financing on equipment related debt can be small in comparison.
The goal is to get the balance sheet in order so that the cash flow of the business can meet all obligations and keep the business credit profile in tact so that credit is not lost or withdrawn from an extended period of short term financing arrears.
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