It is important that you develop a business
recapitalization plan to help your business prepare for reduced cash flow by
doing the following:
- Build a 13-week cash
- Negotiate with your
lenders or new lenders
- Evaluate whether or
not you should recapitalize your business
- Seek alternative and
junior capital sources
Begin by assessing the following variables
related to your cash flow so you can understand your business’s working capital
- Determine the amount
of cash, including accounts receivable you know you will collect, that is
immediately available to you.
- Forecast your cash
burn rate, which is the amount of money your business spends, for a month.
- Determine how much
debt you have and your ability to meet all your financial obligations.
The US Department of the Treasury and the
Federal Reserve are currently assessing alternatives to enable lenders to relax
enforcement of loan covenants to buy time to carry lenders and borrowers until
the economy stabilizes.
- Most credit agreements
state limits or thresholds for certain financial ratios that the company may
- A material decreases
in EBITDA (earnings before interest, taxes, depreciation, and amortization) will
likely trigger a breached covenant.
- If a breach occurs,
the lender commonly provides a 90-day cure period to renegotiate the agreement,
repay the principal or resolve the breach through other actions agreed upon.
If your lenders aren’t flexible in renegotiating
the terms of the loan, you have options.
- Your business can try
to refinance its debt with a senior lender such as a bank or asset-based
- Your business can
pursue recapitalization of the balance sheet by seeking junior capital sources,
which can include subordinated debt and preferred and common equity.
Protects Your Business
Recapitalization restructures your business’s
debt and equity mixture, typically replacing short-term obligations with longer
- While most senior
lenders require a shorter period of time and rigid repayment schedules, junior
lenders may offer terms of up to seven years with flexible repayment schedules.
- Preferred equity can
be negotiated to allow PIK (Payment-in-Kind), adding the dividend to the face
amount of the security.
- Common equity rarely
requires a dividend or scheduled payments.
As we are learning to navigate through these times of uncertainty and adjusting to our new normal, we here are at The Foresight Companies want to be your go-to source for all topics related to your business operations.
Please visit our COVID-19 Business Operations Resource Center frequently for updates.
If you have any
questions or concerns, please do not hesitate to pick up the phone and give one
of us a call at 1-800-426-0165.
note that as information is updated and modified, terms and conditions are
subject to change.