Effective Debt Management for Colorado Businesses: Strategies to Navigate Economic Challenges

As rising interest rates and inflation slow the economy, many companies are struggling to pay back debt. Listed below are few best practices for navigating the current environment.

READ: How Do Interest Rates Impact Real Estate Investing? 

Be proactive

Communication is the key. Yes, it can be a tough conversation with your creditors, but the result will be far better than if one waits.

Gather trusted advisors like your CPA and business attorney, formulate a plan, then schedule a meeting with your creditors. Many local non-profits like the SBA, Small Business Development Centers and local Chambers of Commerce can be a great cost-free or mostly-free resource for advice.

Short-term loan modifications and/or accommodations are usually in everyone’s best interest. Everything is a trade-off for both parties so be willing to give something in return.

Build trust

Tell it like it is. Provide your creditors with realistic projections and updated financial data. By creating a realistic forecast and plan, you are addressing the challenges you can control. This will create a lot of goodwill with your creditors.

If your lender feels they cannot trust you, or that you may be deliberately concealing information, they will likely not wait to act, nor will they advocate for you. Ultimately, it may cost you your company.

READ: Financial Forecasting Insights from Founder and Fractional CFO, Dan DeGolier

Vendors

Your vendors are often providing their own credit to your business in the form of trade terms. Meet with them often and let them know you are doing everything in your power to stay current. Hiding from vendors creates more stress and won’t make the problem go away.

You might be surprised; even partial or reduced payments can go a long way toward maintaining trust and keeping your trade terms from being cut off.

Perform a 13-week cash flow analysis

This is the “go-to” cash flow metric and an important tool in the turnaround industry. The purpose of the 13-week cash flow analysis is to show where an entity’s cash is being generated (cash inflows), and where its cash is being spent (cash outflows), over a specific period of time.

Why 13 weeks? There are four 13-week periods in a calendar year. Essentially, it’s a deep dive into one quarter and an essential tool for crafting a turnaround plan.

READ: How Businesses Can Increase Cash Flow Predictability

What would you say it is you do here?

Presenting your lender with a well-thought-out business review plan may buy you time and build credibility. Most businesses in distress display more than one of the following external or internal signs of trouble.

• Ineffective management or missing management pieces.
• Over diversification or not enough diversification in product or service.
• Poor pricing model and low gross margins leading to low or no profitability.
• Weak financial controls.
• Weak operational controls.
• Poor lender and vendor relationships.
• Market lag or change.
• Precarious customer base — too concentrated or unprofitable clients.
• Even ultra-fast growth is often a (funding and operational) problem that needs solutions.
• Family vs. business matters.
• Operating without a formal business plan.

Is it time for alternative lending?

The current environment is making traditional bank credit harder to obtain. Alternative lenders can be a good short-term bridge (1-3 years) back to more traditional bank credit while providing more flexibility to recover. Alternative lenders often trade off charging a slightly higher interest rate for giving entrepreneurs more freedom. Essentially, you’re paying for three things that can be effective tools for recovery:

• Flexibility: Generally a lack of strict financial covenants and cash flow requirements.
• Availability: Usually this means higher advance rates than a bank will consider, as a percentage of the value of your collateral.
• Scalability: This is the ability of a business owner to very quickly increase or decrease the size of their loan facility or revolving availability as their business recovers. This is usually achievable with very little additional underwriting and can be approved much quicker than a Bank loan — think days, not weeks or months.

Andrew Wilhelmy is VP of Business Development for the Western U.S. at Seacoast Business Funding. Seacoast Business Funding provides up to $30 million in fast, flexible, and economical non-bank working capital lines of credit to growing companies and businesses looking for turn-around funding utilizing their Accounts Receivable and Inventory.