If your company is lucky upside down, resulting in negative cash flow, where can you turn loans? What about pre-profit start-up, where will they change? All are not lost. There are special lenders who serve companies that face this challenge.
Most Shun lenders are permitted with negative cash flows for clear reasons. The base of credit is to avoid borrowers with inadequate cash flows to serve debt obligations and operating requirements. Negative cash flows often signify the problem of deeper borrowers and usually represents a large red flag for most lenders.
But for certain special lenders, companies with negative cash flows can represent attractive opportunities. What are the things that this lender sought to compensate for the impact of negative cash flows? The short answer is strength in several other basic credit element combinations: a very talented management team, a history of successful operation, significantly burdened assets, low financial leverage, a decent plan to change cash flow, and / or the ability of borrowers to offer increase in credit.
Credit increases can take various forms: promise of company assets, promise of personal assets, security deposits, personal guarantees from principals or investors, other corporate guarantees, or other enhancements. This increase plays a role when this particular lender is able to compile transactions that offer what they believe is enough downside to compensate for the risk of negative cash flow.
Who lenders who specialize in loans to companies with negative cash flows? Usually there are several lenders in each credit segment that serves high-risk borrowers. Corporate borrowers with negative cash flows often fall into high-risk categories. Lenders for high-risk groups usually lend hard collateral such as heavy machinery, rolling stock, manufacturing equipment, lab and test equipment and other items with proven after-sales. Some lenders specialize in accounts receivable and records. They look for appointments or direct purchases from quality receivables. Other lenders take a more general approach. They see a complete situation of borrowers, and then arrange transactions with several credit increases. This increase can include collateral the principals, cash and pawn rights of all assets of the company.
In addition to high-risk lenders, there are high-risk leasing companies targeting companies with negative cash flows. This lessor approaches their transactions in the same way as high-risk lenders, unless they compile lease transactions (usually with the ownership of the retaining lessor of the underlying rental assets).
To take additional risks, the lenders and lessor are the safest looking for higher transaction results worth the risk. It is common for high-risk lenders to require loan interest rates several hundred basis points above for traditional bank lenders. Some lenders and lessors take a greater risk. They are willing to exchange additional collateral downside protection for opportunities to receive greater results. They seek increased results in the form of stock warrants, payment of royalties or other equity participation. The increase in results is often an acceptable price to pay the borrower without anywhere to turn around.
Where did you find lenders and lessors who serve companies with negative cash flows? Look for sub-prime lenders or those who hold themselves as high-risk lenders. A good way to find this lender is through reference from bankers, accountants, lawyers and other business colleagues. In many markets, financial brokers actively bring borrowers and high-risk credit providers together.