Are you a small-to-medium-sized enterprise struggling to pursue ambitious growth strategies because you lack financial backing? This is where post-commencement finance (PCF) can help.
PCF allows you to cover critical expenses and invest in key growth areas without compromising your long-term vision. It’s a chance for you to turn financial adversity into an opportunity for strategic development and competitive advantage.
What We Cover:
- What Is Post-Commencement Finance
- Signs You May Need Post-Commencement Finance
- How Post-Commencement Funding Can Stabilise Your Business
- Success Story: How Post-Commencement Finance Revitalised a Global Technology Company
- Best Practices for Securing and Managing Post-Commencement Finance
- Common Pitfalls of Post-Commencement Finance and How to Avoid Them
- A Step-by-Step Guide to Navigate the Post-Commencement Finance Process
What Is Post-Commencement Finance in Business Rescue?
Post-commencement finance provides vital funding to companies after they’ve entered a formal business rescue procedure. It aims to keep your business afloat by ensuring you have the necessary capital for daily operations and to fulfil your restructuring plans. Notably, PCF is a strategic mechanism, not just a temporary fix.
Signs You May Need Post-Commencement Finance
The growth phase of a business brings with it a complex set of challenges that test the resilience and strategic acumen of any organisation. Unsurprisingly, a primary challenge is cash flow constraints. Investments in expansion often require immediate financial outlay, while the returns on these investments may take time to materialise, leading to cash flow pressures.
Additionally, as your operations expand, the need for working capital intensifies, stretching your business’s financial resources.
Unsure whether you need post-commencement finance? Consider the following signs:
- Inability to Meet Debt Obligations. Struggling with loan repayments, lease payments, or other financial commitments.
- Declining Sales or Revenue. A noticeable drop in sales or revenue impacts the business’s ability to sustain operations.
- Inventory Issues. Challenges in managing inventory, either due to lack of funds to purchase necessary stock or overstock resulting from decreased sales.
- Supplier Payment Delays. Regularly extending payment terms with suppliers or facing credit holds due to late payments.
- Increased Borrowing. Relying increasingly on overdrafts or short-term loans to cover operational expenses, indicating unsustainable financial practices.
- Credit Rating Decline. A downgrade in credit rating makes securing financing through traditional means difficult or more expensive.
- Employee Retention Issues. Difficulty paying salaries on time or at competitive rates, leading to high turnover rates or the inability to attract qualified staff.
How Post-Commencement Funding Can Stabilise Your Business
PCF injects crucial capital into your business, improving liquidity so you can continue your operations without interruption. This continuity is crucial for preserving your business’s value, maintaining customer confidence, and preventing the loss of key staff. For companies amid restructuring, PCF enables the implementation of turnaround strategies without the added pressure of financial insolvency.
Post-commence finance also assists you in the following ways:
Facilitates Operational Restructuring
PCF allows you to invest in operational restructuring initiatives critical for long-term survival and competitiveness. This might include investing in new technologies, entering new markets, or reorganising existing operations for greater efficiency. With PCF, you can undertake these necessary transformations even in the face of financial constraints.
Provides a Platform for Growth
For businesses in the growth phase, post-commencement finance offers a platform to pursue expansion opportunities that would otherwise be impossible due to financial limitations. Whether any organisation is launching new products or scaling up production, PCF provides the financial foundation for these projects.
Strengthens Stakeholder Confidence
Securing PCF can signal stakeholders, including customers, suppliers, and employees, that the business has the financial backing necessary to navigate its current challenges. This can enhance stakeholder confidence, stabilise the business environment, and potentially attract further investment or credit terms.
Enables Strategic Flexibility
With the financial breathing space provided by post-commencement finance, your business gains strategic flexibility. You can negotiate from a position of strength, which is an advantage when adapting to market conditions and seizing strategic opportunities.
Success Story: How Post-Commencement Finance Revitalised a Global Technology Company
Facing bankruptcy in 2012, Kodak secured $950 million in debtor-in-possession financing, a form of post-commencement finance, which allowed the company to continue operations while restructuring. The PCF provided Kodak with the necessary liquidity to maintain its core operations, pay employees, and invest in new technology sectors, thus preserving the value of the enterprise for its stakeholders.
By effectively utilising PCF, Kodak could reorganise its business model and emerge from bankruptcy as a leaner, more focused entity. This transformation included selling off certain patents and exiting unprofitable business segments, ultimately leading to a sustainable growth and innovation path in its digital imaging and printing divisions.
Best Practices for Securing and Managing Post-Commencement Finance
Begin with a thorough financial assessment to pinpoint your exact funding requirements. This step involves a detailed analysis of your current financial situation, including cash flow projections and an evaluation of existing liabilities.
Next, explore the landscape of financing sources. The market offers a variety of lenders, from traditional banks to private equity firms and alternative financing options. Each comes with its own set of terms, benefits, and drawbacks. By comparing these options, you can identify the best fit for your business’s unique circumstances and needs.
Prepare a Compelling Case
Your next step is crafting a robust business plan. This plan should articulate a clear, realistic strategy for your business’s recovery and growth, emphasising how you will use the PCF to achieve these goals. Include detailed financial projections to support your strategy.
It’s also essential to highlight the inherent strengths of your business. Whether it’s your competitive positioning, loyal customer base, or untapped market potential, showcasing these attributes can significantly bolster your case as it reassures lenders of your business’s capacity for successful turnaround and growth.
Smart Negotiation and Structuring
Engage lenders with a clear understanding of your business’s needs and a strong case for your proposed terms. Focus on negotiating aspects such as interest rates, repayment schedules, and any covenants to ensure they align with your operational realities and financial projections.
It is equally important to carefully structure the post-commencement finance. Aim for a structure that complements your business’s cash flow patterns and growth cycle.
Once you’ve secured post-commencement finance, it’s advisable to direct the finances towards areas that promise the highest return on investment. You should also continuously monitor your financial performance against projections; this not only helps ensure that the PCF is being used as intended but also allows for timely adjustments to your operational and financial strategies.
Common Pitfalls of Post-Commencement Finance and How to Avoid Them
A common misstep is overly optimistic cash flow projections. Such optimism can lead to securing insufficient PCF, resulting in a shortfall that could hamper recovery efforts.
To mitigate this risk, your business should adopt a conservative approach in its financial projections. Incorporate realistic assumptions based on current market conditions and historical data. You may also wish to engage with a financial advisor for an impartial assessment to better understand your financial needs.
Additional pitfalls include the following.
Underestimating the Total Cost of Financing
PCF comes with costs beyond the principal and interest. There are fees, legal expenses, and potential penalties that can accumulate and affect the total cost of financing. Before agreeing to terms, carefully review all associated costs.
Failing to Align PCF with Business Goals
Another pitfall is not aligning the PCF with the business’s strategic objectives. This misalignment can lead to misallocated resources, diluting the impact of the financing. Ensure that the use of PCF is tightly integrated with your strategic plan. It’s also wise to regularly review your strategic goals and adjust the allocation of PCF funds to ensure they support your most critical objectives.
Lack of Communication with Stakeholders
Inadequate communication with stakeholders, including employees, customers, suppliers, and lenders, can lead to uncertainty and diminished confidence in the business’s future. You should maintain open lines of communication and provide regular updates on the business’s performance and how PCF is used to achieve recovery and growth. After all, transparency builds trust.
Neglecting Legal and Compliance Obligations
Failing to adhere to legal obligations can result in penalties, legal challenges, or breaches of covenant that could jeopardise your post-commencement finance arrangement. To avoid legal repercussions, work closely with legal advisors to ensure all agreements are in compliance with relevant laws and regulations and that your business remains in good standing throughout the term of the PCF.
A Step-by-Step Guide to Navigate the Post-Commencement Finance Process
- Step 1: Assess Your Financial Situation. Conduct a detailed analysis of your current financial health.
- Step 2: Develop a Strategic Business Plan. Prepare a comprehensive business plan that outlines your strategy for using the PCF.
- Step 3: Identify Potential Lenders. Research and identify potential PCF providers, considering both traditional lenders and alternative financing sources.
- Step 4: Prepare Your Application. Gather all necessary documentation, including financial statements, business plans, and projections.
- Step 5: Engage in Negotiations. Engage with potential lenders, presenting your case and negotiating the terms of the PCF.
- Step 6: Finalise the Agreement. Once terms are agreed upon, work through the legal documentation to finalise the agreement.
- Step 7: Utilise the Funds Effectively. Implement your plan for the use of PCF funds, prioritising expenditures that will have the most significant impact on your business’s recovery and growth.
- Step 8: Monitor and Manage. Establish a system for monitoring your business’s financial performance and use of funds.
At Merchant Factors, we can provide a fast and flexible cash flow boost for when you need to expand your business. Our vision is to offer growing businesses an alternative to traditional bank loans and overdrafts. Since 1988, emerging small and medium-sized enterprises have chosen us for working capital funding solutions.
“Merchant Factors joined our team and financed our aggressive planned growth strategy. Being able to keep up with the short-term cash flow demands, and freeing up capital for development, allowed us to expand our offerings and reach a new array of customers. We are on track to double our annual turnover.” – Marius van Emmenes CA (SA), Copper Cables and Connectors (Pty) Ltd.
Contact Merchant Factors to learn how we can support your business’s growth.