Timing is crucial for successful restructuring
The immediate challenge in most cases is finding the finance to support the restructuring process. Picture: iStock.
Businesses in need of restructuring need finance to fund the process. That can be a sticky situation to be in.
“It’s all about cash flow. If a business runs out of cash, it’s going to fall over,” says Ken McAndrew of Camigo Consulting, a growth and M&A advisory firm.
“What usually happens is that, if it’s performing badly, they’ll get advisers to come in and have a look at it, do a short-term cash flow statement, looking at the next six months to say, ‘if we don’t change anything, how long before this business isn’t solvent?’” From there you plan around what you would like to do differently, whether raising funding to sell more products, selling part of the business or an asset, taking out costs, or a mix of all.
“Whatever lever you pull, having a business plan around how you are going to grow from there is key,” says McAndrew.
The immediate challenge in such cases is finding the finance to support the restructuring process.
“That includes funding essential costs, stabilising working capital, refinancing existing obligations, supporting operational change and providing the business with enough breathing space to complete a credible financial and operational turnaround,” says Keith McDonagh, head of corporate finance at Xeinadin.
“The difficulty, of course, is that restructuring usually takes place when a company is already under pressure,” he explains.
“The capital structure may be stretched; cash flow may be volatile – reduced or with reducing trends – and there may be significant execution risk. In that environment, the funding conversation with debt or equity providers shifts very quickly to rescue capital, where the pool of willing providers becomes shallower and more specialised.” Businesses requiring restructuring can look to a number of sources of capital, depending on the severity of the situation, the quality of the underlying business and the assets or cash flows available to support funding.
“The first port of call should be the existing banker or funder. If the business has a long-standing relationship and the underlying fundamentals remain credible, banks may be prepared to provide short-term support, covenant waivers, temporary facilities or an amendment-and-extension package,” says McDonagh.
Where traditional banks are reluctant, specialist lenders can step in. “These providers focus on distressed or transitional situations and are often more comfortable lending against assets, receivables, inventory, contracts or other easily liquidated collateral. They can also move more quickly than mainstream lenders and are often better suited to understand such businesses,” says McDonagh.
Private credit has become an increasingly important source of financing for restructuring situations. These lenders can offer senior secured debt, junior debt, bridging finance or more bespoke solutions where the capital structure needs to be reworked.
“They are particularly useful where the business has a credible recovery plan but does not yet meet the requirements of a conventional bank,” he says.
From a funder’s perspective, restructuring itself is rarely the issue. “The key question is whether there is a viable business at the end of the process, supported by a credible turnaround plan and sufficient assets or cash generation to support ongoing funding,” says Ala Browne, Bibby Financial Services sales lead.
While traditional lenders may become more cautious where profitability has deteriorated, or banking covenants have been breached, specialist alternative funders often take a different view. “The focus is less on historic challenges and more on the quality of the underlying business, its customers, management team and prospects for recovery,” he says.
In many cases, a business may still have a strong sales ledger, well-established customer relationships and a profitable core operation, but require additional working capital to navigate a period of change.
“Funding solutions such as invoice finance or broader asset-based lending can unlock liquidity already sitting within the balance sheet, providing the headroom needed to implement a restructuring plan, support day-to-day operations and fund future growth,” says Browne.
“That said, funders will look closely at management capability, cash flow forecasts, customer concentration and the credibility of the proposed turnaround strategy. Businesses that engage early and are transparent about the challenges they face are typically better positioned to secure support. In restructuring situations, timing often matters as much as the funding itself.”
