So do you have a Debt Strategy?

2022 so far has been a year of largely negative market sentiment because of a variety of factors including inflation, supply issues, increasing interest rates, regional war, political instability and probably many more. As a result, many recent conversations with clients and the professional community have generally centred on the threat of lower growth and the possibility of an economic recession. Equally, there remain many sectors managing unprecedented growth and the challenges that brings for funding.

So what does this mean for companies and their debt strategy?

Whether your business is in a growth or turnaround phase having a clear debt strategy is fundamental to good corporate governance. You need to know your options should opportunities or threats arise and ideally have strong relationships to implement quickly if required.

Debt Capacity

The start point for any debt strategy is to understand the debt capacity of the business, how much could you borrow. This requires a review of the business, including the quality of its cashflows and assets and the sustainability of earnings, amongst other factors. The assessment doesn’t start with what your bank could fund, more what the wider debt market could, which will usually be materially different.

Financial Management & systems

To facilitate this review a business will need strong financial management and systems or be open to these being improved or supported by external assistance. The ability to produce forecasts including cashflow should be second nature to most established businesses but this isn’t always the case but is a critical success factor to a debt raise where the amount involved is a material increase or when trading is softer than the budget.

Accurate forecasting

At times of greater uncertainty forecasting becomes much more difficult. This is best mitigated using a financial model that enables the numbers to be sensitised both up and down. If the core systems can’t support this, producing a separate transaction model will give the funder a bit more confidence on the forecasts.

Diversity of funding options

Most companies know the high street banks and a small number of assets based lenders to fund vehicles and equipment. That said, many don’t have established relationships with a back-up funder should their main lender have limited appetite for the business in the hour of need. They also don’t know the potential solutions from well over 100 alternatives funders in the market.

Next Steps

Understanding the debt capacity of your business, having the financial systems to support a funding request and knowing and building relationships with the most relevant funders for your business is not as straightforward as it used to be. Timing is also everything.

So if you would like help building your debts strategy, please contact Paul Wood here to explore whether Funding Compass can help.

Funding Compass is a consultancy business focused on strategic & debt advisory and transaction support.