Overcoming The 5 C’s of Credit During a Recession

I met with a prospect last week that is in serious trouble. Due to increased competition and reduced demand, they have sustained significant losses over the past few years. They have a turn-around plan. They have a good team of employees. They have the inventory to sell. They have clients to sell to. There is only one thing they don’t have, cash.

I would argue that running out of cash is the most common reason businesses fail, regardless of the size or industry of the company. Securing financing during this recession has become increasingly difficult. However, it is not impossible. In order to play the game, you need to understand the rules. The rules are the 5 C’s of Credit (Collateral, Capacity, Capital, Conditions, and Character). If you are reading this article, chances are your business is struggling in one or more of these areas. Here are three techniques we use to overcome problems with The 5 C’s of Credit.

Compelling Story

When you are looking for financing, a good story goes a long way (especially when you are trying to obtain financing for a less-than-perfect business). What has changed that is going to make the future better than the past? Who have you hired/fired? What have you learned? Although most financiers will not ignore the numbers entirely, a good story can make the difference when your business is a somewhat risky investment. When I say good story, I mean a story rooted in believable facts (e.g. solid projections, defendable assumptions, strong business plan). I have seen a good story make up for every one of The 5 Cs of Credit.

Partnering

When your business lacks Character, Collateral, or Capital, it may make sense to secure a strong financial partner. Financial partners come in many forms (private investor/lender, guarantor, etc.). Our clients have used friends, family, vendors, government, and even competitors to help secure financing. Make sure you consult with your trusted advisors before entering a financial partnering arrangement. I have seen businesses inadvertently given away due to cleverly drafted legal documents!

Acquisition

Buying a business? In this environment? Without cash? It may seem crazy at first, but think about it. If you are hurting, what do you think is happening to your competition? The trick is to identify situations where 1+1=3. For example, we have structured deals where our client paid nothing out of pocket, folded the competitor into their operation, and all of the equity stakeholders made more money (including the sellers). In this circumstance, a good portion of the income benefit came from the elimination of redundant overhead (e.g. now they only needed one phone system, one computer network, etc.) The end result was a much more viable, bankable company.

These are just some of the innovative ways we are getting financing deals done. Hopefully these ideas will help you secure the cash your business needs. Without cash, there is no business.

Government Programs to Assist With Home Mortgages

Below is a link to a website that describes the government plan to help homeowners refinance or modify their mortgages.

Refinancing: Many homeowners pay their mortgages on time but are unable to refinance. This prevents certain homeowner from taking advantage of today’s lower mortgage rates (perhaps due to a decrease in the value of their home). A Home Affordable Refinance will help borrowers whose loans are held by Fannie Mae or Freddie Mac refinance into a more affordable mortgage.

Modification: Many homeowners are struggling to make their monthly mortgage payments either because their interest rate has increased or they have less income. A Home Affordable Modification will provide them with mortgage payments they can afford.

Learn more on their website:

www.financialstability.gov/makinghomeaffordable