Bankruptcy and Turnaround Financing – Critical Points in Choosing a Lender
Insights into Bankruptcy and Turnaround Financing… What These 4 Experts Had to Say
In response to last month’s bankruptcy blog, I spoke to colleagues in the turnaround and bankruptcy industry who shared insights with me. It is always best to surround yourself with experts in the field whose extensive knowledge can help your company when it is going through difficult times.
Their insights are invaluable for companies exploring bankruptcy options.
Here are Critical Points in Choosing a Lender:
Ability to quickly and expertly respond to the needs of the borrower, the court and the other important parties in the case
Lender’s experience in bankruptcy court
Lender’s ability to follow through on the financing that they have proposed for the client in bankruptcy.
As mentioned in last month’s blog, our Founder, President and CEO, Harvey Kaminski is a bankruptcy attorney and experienced in the bankruptcy forum. This is highly advantageous when seeking financing for the bankruptcy case. (“DIP financing”) As the points listed above mention, when your lender is experienced in bankruptcy law and has familiarity with the bankruptcy courts, that is a recipe for success.
As Tom explains, “Working with Prestige’s Founder, Harvey, we got to see firsthand the benefit of working with a factor who knew his way around the bankruptcy court. He was able to break down the terms of his factoring program in very simple terms to all parties in the bankruptcy court, enabling the process to move forward quickly. Every day that is spent in court, is expensive for the client, therefore having a financier who is also an experienced bankruptcy attorney creates a tremendous benefit for the client.”
Other Benefits of Working with a Firm Like Prestige are:
Prestige is a well-known, experienced firm and a respected finance company in bankruptcy court. Therefore the client can minimize delay and expense in getting court approval.
Prestige can explain their factoring process simply to all parties involved and it has the sophistication and wherewithal to provide the financing required.
Cynthia Romano is a Partner at CR3 Partners, an advisory firm which provides Performance Improvement and Turnaround/Interim Management services for middle market companies nationwide. During the course of our conversation, she shared with me the following nuggets:
Bankruptcy protection is one tool available for use when restructuring a company. There are benefits to restructuring and reorganizing out of court but a Chapter 11 filing (typically used to reorganize a company or sell its assets as a going concern) provides a company runway to operate and reorganize or sell, freed (albeit temporarily) from the constraints of prior claims. As a result, court protection can be beneficial under some of the following scenarios:
Companies with lawsuits pending or judgements ordered that have been or are likely to be filed – the Chapter 11 will stay (i.e. halt) those claims.
Companies with complex capital structures and/or many holders of debt where getting a consensual deal done is not possible – the Bankruptcy Code has lower thresholds for approval of a compromise than most debt indentures.
Companies with contracts to perform that they are unable or unwilling to fulfill or contracts that are needed that the vendor is no longer willing or able to fulfill – in a Chapter 11, the company can assume or reject any contract at its sole discretion, which includes real property leases (particularly valuable for retailers who have filed recently), and, secondarily, damages from rejecting contracts and leases are capped by the Bankruptcy Code.
Companies needing to be sold or needing to monetize claim laden assets – assets sold through a Chapter 11 process are able to be bought free and clear i.e. the new buyer cannot be held liable or responsible for problems of the past company.
As useful a tool as Chapter 11 protection can be, the benefits of restructuring out of court are worth consideration, particularly for small and middle market firms. Specifically, It is generally much less expensive and faster to reorganize or sell assets out of court due to the cash requirements of a Chapter 11 filing including retainers, professional fees, deposits, and the overall duration of a typical Chapter 11. This is particularly true for small and mid-sized companies. Therefore, there is not a right answer for whether to reorganize or sell in or out of court. Rather, the decision is dependent on a mix of factors particular to the company’s size and situation.
Speaking with my colleague, Mark Podgainy, Managing Director at the Financial Advisory Firm of Getzler Henrich & Associates LLC, I gained insight into topics related to trends in bankruptcy.
One of the Interesting Things that I Learned is that Bankruptcy is Often Affected by the Seasons, Due to the Following Reasons:
In the third quarter, Financials are reviewed and that is the time when lenders will pull back on loans that are not performing well or clients who have breached financial covenants.
If the clients are in the consumer space, and they did not have an active summer and third quarter, then they will be seeking advice on filing.
Certain Industries May be Affected As a Whole, Examples Include:
The oil crash causing bankruptcy filings to rise in the oil and gas industry.
Weak performance in retail stores are causing many retailers to file for bankruptcy protection as well.
Healthcare can be another troubled sector, when there are changes to the reimbursement for certain services and that spikes problems for specific sectors in the industry, one recent example is laboratory testing facilities
Economic Factors can Affect Industries As Well:
When there is a recession and there is a downturn that no one is expecting that can cause problems across the board.
Additionally, when companies experience accelerated growth – at the same time that there is a working capital squeeze- that would be a reason to file, because they don’t have enough cash supporting that explosive growth.
In deciding whether or not to file, it is important to look at the complete picture: how big is the cash hole, what is the timing of the cash infusion. If you are able to obtain DIP financing, does it make sense to take the money? Will the company be able to get under control? Does the company still have reason to exist in the industry sector that they are in during this point in time?
The most important decision you can make in selecting a finance partner, is SPEED, RESPONSIVENESS and LENDER SOPHISTICATION.
Other important points are the advance rate that a client can obtain from their lender. Interestingly, cost is less of an issue than availability if you are in a tight spot. CASH is the most important thing. If you need to make payroll next week, can your new lender support or not. Like truth in advertising, …is there consistency in the term sheet and the way that the lender is operating and does that follow through to the end? “My experience with Prestige is that their speed and industry knowledge makes them best in class.”
In summary, Choose partners who are experienced and who can guide you through the choppy waters of restructuring and bankruptcy with ease and confidence.
Choosing Factoring for DIP Financing Explained
Working in the factoring industry prior to joining Prestige Capital, I had not been aware that one of the most important beneficiaries of accounts receivable financing are companies seeking to restructure in bankruptcy. Chapter 11 bankruptcy laws allow Debtor-in-Possession (“DIP”) financing in the discretion of a bankruptcy judge if he feels that such financing will stabilize cash flow and ultimately help the company file a Chapter 11 Plan and exit bankruptcy.
Harvey Kaminski (Co-Founder of Prestige Capital) Insight on DIP FInancing
The co-founder of Prestige Capital, Harvey Kaminski, is a bankruptcy attorney. When he formed Prestige Capital, he utilized his expertise in this area to assist companies needing immediate financing after they filed Chapter 11. One of the areas that can slow down DIP financing is satisfying the legal requirements of the Bankruptcy Code. Fortunately, Mr. Kaminski has extensive knowledge in this sector. Therefore, he is able to assist the debtor and facilitate DIP financing, without the need of additional outside counsel. His familiarity with the bankruptcy courts and attorneys involved in these cases, enables clients to obtain financing quickly so that they can continue to operate in bankruptcy without skipping a beat in their business operations. The sophistication of a lender is always important in understanding a client’s needs and the industry specificity of their invoices. However, in bankruptcy it is even more critical to have a comprehensive understanding of the process.
In our 34 year history, Prestige has been recognized as a leader in the DIP financing industry, able to close deals expeditiously. We are repeatedly called upon by attorneys, trustees and clients who seek our guidance through the bankruptcy process.
Here are some things to consider in choosing factoring for DIP financing:
Factoring is easier to obtain than conventional financing since it uses accounts receivable as its main collateral.
Factoring provides predictable cash flow by eliminating the uncertainty of when an invoice will be paid.
Factoring provides the funds to pay vendors and employees ensuring the company can continue operations during the bankruptcy period.
Companies that implement DIP financing solutions (such as factoring) have a greater chance of emerging from Chapter 11 bankruptcy.
Factoring grows with your sales, providing capital as the company’s sales increase.
Here are examples of companies that Prestige Capital has factored in bankruptcy:
Three related entities consisting of janitorial maintenance, security guard and landscape businesses. In these situations, we were called by a turnaround advisor who had previously worked with Prestige and was now retained by bankruptcy counsel. In the past, these companies had been self-funded. However, they sought Chapter 11 relief and financing due to a large federal tax lien. Within 10 business days, Prestige provided the DIP financing needed to keep the company operational thereafter allowing the companies to develop its plan of reorganization.
A company that manufactured custom minted coins and metals filed Chapter 11 due to irregular cash flow and poor management. Thereafter, they sought DIP financing in order to fund continued production. Prestige was approached by the bankruptcy trustee, who was appointed by the Bankruptcy Court to facilitate the company’s reorganization and possible sale of the company. Ultimately, Prestige agreed to factor the company pursuant to a DIP Order of the Bankruptcy Court which allowed the company to fill existing orders.
Working with an experienced lender is a key to a success. I am glad that I am able to see firsthand how Prestige has helped companies turn around post-bankruptcy to grow and flourish.
Business Growth, Partnerships and Endurance
It takes a village…to guide a business on its journey.
Reflecting on twenty years in the factoring industry, I have come to understand that it takes a village to grow a business; a community of trusted advisors who can guide a business on their journey.
The Journey of a Business Owner
How many business owners are truly prepared for the journey of starting a business? According to U.S. Small Business Association, in 2010 there were 27.9 million small businesses, and 18,500 firms with 500 employees or more. About half of all new establishments survive five years or more, and about one-third survive ten years or more. Once in the trenches, do they have the guidance and mentors to help them succeed?
Benefits of Consultative Selling
I have made it my mission to educate business owners, which is one of the most rewarding parts of my profession. I employ consultative selling; using all of my resources to explore a client’s path and never assume that my company is the perfect fit. The reward of this is when the right client comes to you referred by a client who wasn’t the right fit at the time.
Alternative Finance for Companies
I am fortunate that I get to work with partners who possess a diverse range of skills who can share their wisdom with business owners. Working together with my colleagues, we create seminars about working together with my colleagues, we create seminars about alternative financing options and other useful business practices. By bringing everyone together, entrepreneurs gain insight and learn new ways to finance and grow their business. The topic that I speak about is FACTORING. According to The Wall street Journal, companies that use factoring find it helpful because they receive cash rapidly rather than waiting the usual 30 or 60 days for payment.
Educating Business Owners at Daymond John of Shark Tank Fame Boot Camp
I was extremely fortunate to meet Daymond John of Shark Tank Fame and was invited to speak at his Boot Camp for Entrepreneurs.
It was a gratifying experience to present to a room full of hopeful entrepreneurs and learn about their ideas and visions. I was able to educate them on accessing capital in place of equity (which most believed was the only option) and bank financing (which is nearly impossible to obtain if you are a start-up business). There, I had the opportunity to meet a carefully curated group of speakers. I.e.,“The Village”: patent and trademark attorneys, purchase order financing firms, marketing and branding companies, website design firms, business plan advisors, accountants, insurance advisors, PR firms, banks, angel investors, venture capital firms, and more.
During the coffee break, we all mingled with the attendees who expressed how valuable the seminar was and how useful the workbook will be as they plan for their future success.
Based on the success of my presentation at Daymond John’s boot camp, I am a part of the Business Concierge atBlueprint + Co. “Blueprint + Co is more than a workspace; it is a community. During a recent visit, I was able to participate in lighting the menorah for Chanukah with some of the members. Being a part of the Business Concierge for Blueprint + Co has been an honor and a lot of fun and extremely rewarding.”
BBC- The Why Factor
Those of you who know me, know that I conduct many “Lunch and Learns” and frequently speak and write on a variety of financial topics. My favorite topic is helping businesses find the funding they need to grow. This spring I was honored to be asked to participate in a BBC “The Why Factor” panel on entrepreneurship. It was a great experience, and at the same time, I discovered some global perspectives about American business. I also had the opportunity to meet other entrepreneurs. My interview begins at 42.28 minutes. The full show can be found here – it’s an interesting interview.
Rachel Presents at the WeWork Lunch and Learn
For the past two years, I have been fortunate to be a member of the WeWork community. I host lunch and learns at their various locations. These seminars have brought to light the fact that business owners are hungry for advice from mentors. They often haven’t had the necessary exposure to advisors who can share their experience and insights to assist them on their journey. Here is feedback from one of the attendees.
“Rachel’s lunch-and-learns are fantastic: She’s a real pro, and I learned a lot about debt-financing options for growing businesses. In addition, her events are great for networking. I highly recommend attending.”
I was excited to be a hands-on advisor to early-stage businesses. It was extremely gratifying to receive an email from one of the attendees who informed me that they have completely changed course in their selling approach as a direct result of our conversation.
“Thanks for the great input and good ideas. It really got some of the creative juices flowing.
Last spring I was pleased to be invited to present to early-stage businesses at LaunchPad in Huntington, NY. LaunchPad is a business incubator, startup accelerator, and co-working community with six locations on Long Island. According to the Kaufman Index of Entrepreneurial Activity (KIEA), the entrepreneurial rate in the U.S. is already well above the bubble of 15 years ago. It adds up to over 20 million non-employer businesses out there today, with more starting each day. The companies were eager to learn about the various forms of financing that were available to them. Speakers included a bank and a business broker. During my presentation, I was able to discuss real examples of how I could help the companies that were in the audience.
Business owners often don’t know what they don’t know.
My mission is to expose them to all the necessary information to help them succeed.
Grateful to Love What I Do…With People that I Respect…In an industry that I Love
At year’s end, I reflect on the past year and appreciate how fortunate and blessed I am to work in an industry that I love and to work with people I respect and admire.
I am thankful for the amazing team at Prestige Capital, who make my job easy by using their combined 35 plus years of experience to run our firm with integrity and ease for our clients. Working with our team for over 10 years, I have come to recognize that our way of doing business makes our clients feel like family. We treat each potential client with dignity and grace, whether they are a fledgling startup or a middle market company. With patience and care, we explain our processes and guide them in the right direction should we not be able to work with them.
I have had the good fortune to have prospects refer me to their colleagues because of the care that we have shown them on the initial call. Oftentimes, I get calls from people that had contacted me many years ago, that we were unable to work with at the time, and have now grown their business and are ready to work together.
Many of the ways we have assisted companies over the years have been by speaking on financing panels or writing articles to educate companies about ways to access capital that may have been unknown to them. The information I shared included factoring and/or purchase order financing and factoring, or sometimes doing a bank carve out. Oftentimes, when a client has an existing bank loan and needs to fill an order or needs excess liquidity above the loan amount, a bank will allow particular debtors to be “carved out” of their collateral so that a finance company can provide immediate liquidity.
We have also worked with companies whose businesses have gone through tough times and have needed to replace their traditional financing with receivables financing, whether they are companies in turnaround or bankruptcy. Our expertise in closing these transactions quickly and painlessly has earned us a stellar reputation in the industry.
Working with our bank partners, it is nice to know that they have us on “speed dial” to assist them when they cannot fund quickly enough and know that we can help them obtain or retain a client.
In over 20 years of business development, it has been interesting to see the changes in how business is done and the new industries that have cropped up. Traditionally financing wholesalers, distributors and manufacturers, we are now seeing a huge increase in technology clients. Whereas they were once a small part of our portfolio, our clientele of technology businesses is growing rapidly.
Recently, we had two clients connected to the innovative industry of self-driving cars. Nissan’s robocars, for example, needed human intervention once every 247 miles, compared to once every 14 miles in 2015. We have seen great changes in the food and beverage industry as well. As an attendee of The Fancy Food Show for 20 years, it is amazing to see how the food industry has evolved. In the past, it was aisle after aisle of unhealthy snack companies.
Today, the aisles are bursting with Non GMO, Gluten Free, Fair Trade, Kosher, etc. products being sold. Anything from kale chips to Kombacha juice; snacks made from chickpeas to edible drinking cups…the future of food innovation is now. Our construction clients are growing at a rapid pace as they contribute to the construction boom, especially in the NY area. The amount of New York construction permits recently tested quarter highs at 45,000, which is a great sign for what’s to come in the years to follow. As I walk through the city, I am amazed at the speed in which new hotels, residences and office towers are going up.
The wonder I feel to be living during this technological revolution makes me feel so grateful to be working in an industry that provides capital. It gives me a front seat to the future of business. Being part of many companies’ successes over the years makes me feel energized and proud.
It is so rewarding to have past clients hugging me at trade shows thanking me for assisting them during hard times, and to have clients that graduate to traditional financing who then introduce me to their colleagues. It is also so extremely satisfying to have clients who have sold their now successful companies, come back to finance their new start-up. These are the rewards of the profession that I have chosen.
Therefore, with gratitude, I thank my clients and referral partners and our team at Prestige for allowing me to Do What I Love. I especially thank WeWork for giving me such a beautiful space to work in the city that I love, and allowing me to meet and mingle with their members.
Bridge Financing with Prestige Capital
Bridge Financing allows a company to access capital very quickly when timing is of the essence. These situations are either when a bank or asset based lender cannot finance as quickly as needed, or when a company is seeking equity or when cash is required to complete a leverage buyout. To learn more about this service that Prestige Capital Corp. can provide, please contact us today!
During this time a client is usually in a tremendous cash crunch or behind in filling orders.
The Benefits of Bridge Financing
Prestige finances companies in 5-7 days thereby “saving the day” for these companies.
Many bankers refer clients when they are unable to finance a deal as quickly as possible. In these situations Prestige can literally “save” the client from either going out of business or from being unable to fulfill their orders in a timely manner, thereby jeopardizing their client relationships. Once the client has obtained the bridge financing from Prestige, it then gives the banker time to close their loan without the added pressure placed by the client on closing quickly.
Investment bankers and other referral partners refer clients when they know that timing is of the essence and the more traditional lenders who are working on closing the deal are taking too long.
Here are some samples of Bridge Financing transactions that we have funded that illustrate how nimble and flexible we can be to save a deal:
An investment banker contacted us with a leverage buyout opportunity that suddenly became time sensitive.
Reason being, the previous funding source worked for months trying to approve the loan and the buyout structure. They were “dragging their feet” thereby jeopardizing the purchase opportunity.
When the investment banker advised us that the buyer was fearful of losing the purchase he asked if we could close this complicated 17 million dollar multi-company leverage buyout in less than two weeks.
With “all hands on deck,” we were able to close the deal within this time frame, saving the deal and earning us the admiration of the client, seller and investment banker.
Bridging the Gap with Prestige Capital
We agreed to allow the client to exit our facility after 3 months with no break-up fees whatsoever. This will allow the client the option of obtaining more traditional financing now that the pressure is off and the company has been purchased.
Another bridge financing deal was referred by a banker whose client was in the food industry. She stated that while her underwriting would take 3-4 months, the client was pushing her to get it done sooner, and she was fearful that the client might start to “shop” various other lenders and she would lose the deal.
At the Summer Fancy Food Show last month, this client gave me a huge hug and told me that had it not been for Prestige stepping in when we did, they would not have been able to fulfill these orders during their high season and they would have lost face with their clients. As a result of that, those orders have grown tremendously since that time.
Similarly a banker called last week to discuss the following scenario. Her client, who has a seasonal business, has orders flying in during the summer months faster than she can get the product out the door. As this bank will also take at least 3 months to underwrite, the banker suggested that Prestige step in and finance the existing orders to keep the pipeline of business growing without a stop. The client was thrilled that this was an option (she had been unaware that bridge financing existed) and we were able to provide quick access to the capital that she needed to continue to grow sales during this season.
As a non-bank lender, Prestige is able to provide capital this quickly as our underwriting is NOT on the company itself.
We underwrite the client’s customers and simply need to obtain a first lien on the assets for the period of our financing. (Additionally, a personal background check is important to us as we want to be sure that our clients’ character is not an issue.)
Prestige is one of very few factoring companies that provide bridge or short term financing. While most factors require a client to enter into contracts with long terms ranging from 12 to 36 months, Prestige will consider a term as short as three months. Bridge financing is usually utilized when a client is awaiting imminent funding from a third party but requires capital until that funding actually takes place. A primary example is a company in the process of receiving a line of credit from a bank or finance company. Prestige will fill the gap of 3-4 months of providing liquidity to the company until the permanent financing is underwritten, documented and closed. Another example is a company that requires short term liquidity while it is in the process of raising equity. In both of these examples , Prestige will work with all parties to ensure a smooth transition once the final financing is achieved at which time Prestige exits the picture.