As the price of many commodities continues to drop and costs and interest rates remain elevated, operating losses are mounting. The realization is coming to producers that operating lines of credit with various lenders may be difficult to pay down come renewal time. One can expect the requirements for loan renewals will become more conservative as analysts, review teams, and regulators step up the intensity of review in this economic down cycle. How can one build a case for refinancing or restructuring of losses in the longer term?

Proactive and responsive

The days of reviewing your financial statements once per year for tax reasons or to renew your operating line of credit with minimal information are in the rearview mirror. Whether it is a traditional institution or vendor financing, lenders are going to require more accurate and up-to-date financials. This will include balance sheet schedules and inventories with lists and documentation to back up the numbers.

Do not be surprised at the request for at least three years of tax records. More lenders will make accrual adjustments on inventories, accounts payable, accounts receivable, prepaid expenses, and other expenses that accrue during the year.

Identify the reasons that you have had losses or issues and the need for debt refinancing or restructuring. Was it a macro-economic issue such as prices, higher costs, or increased interest rates? Was it primarily a micro-economic issue such as management or some unexpected events? Or were losses a result of a combination of both macro and micro issues? We all make mistakes, so do not beat yourself up because of them. The key is to not continue to make the same mistakes and have a plan to overcome the issues.

The plan

You will be required to develop a monthly or quarterly cash flow. Yes, you can ask for guidance and assistance from your lender or outside expertise. However, it is ultimately your responsibility. The cash flow should include a best, average, and worst-case scenario with production, price, cost, and interest rate assumptions. What are the actions you will take to get to breakeven or above? Remember, the analysts and reviewers behind-the-scenes often only analyze the data. Therefore, realistic and well-articulated numbers will be critical to increase your odds for refinance success.

Communication

There is a tendency to go silent or hunker down when times get tough. Open lines of communication with your lender with periodic review timetables can be expected. In the communication process, neither the borrower nor a lender like unpleasant surprises. Keep surprises to a minimum by practicing good communication.

The aforementioned advice has been influenced by my experience being involved with two business turnarounds. Managing through the tough times and following these tips are advantageous to both the lender and borrower and will position the business for success in the future.