Finance Roll

If your company's fortunes reverse, resulting in negative cash flow, where can you turn for a loan? What about pre-profit start-ups, where are they to turn? All is not lost. There are specialty lenders who cater to companies facing these challenges.

Most lenders shun companies beset with negative cash flow for the obvious reasons. A credit basic is to avoid borrowers with insufficient cash flow to service debt obligations and operating requirements. Negative cash flow often signals deeper borrower issues and usually represents a large red flag for most lenders.

For certain specialty lenders, however, companies with negative cash flow can represent attractive opportunities. What are some of the things these lenders look for to offset the impact of negative cash flow? The short answer is strength in some combination of other basic credit elements: a highly talented management team, an otherwise successful operating history, significant unencumbered assets, low financial leverage, a viable plan to turn cash flow around, and/or the ability of the borrower to offer credit enhancements.

Credit enhancements can take many forms: a pledge of company assets, a pledge of personal assets, security deposits, personal guarantees of the principals or investors, other corporate guarantees, or other enhancements. These enhancements come into play when these specialty lenders are able to structure transactions offering what they believe is sufficient downside protection to offset the risk of negative cash flow.

Who are the lenders that specialize in lending to companies with negative cash flow? There are usually a few lenders in every credit segment that serve high-risk borrowers. Corporate borrowers with negative cash flow often fall into the high-risk category. Lenders to this high-risk group usually lend against hard collateral such as heavy machinery, rolling stock, manufacturing equipment, lab and test equipment and other items with proven after-markets. Some lenders specialize in accounts and notes receivable. They look for a pledge or an outright purchase of quality receivables. Other lenders take a more general approach. They look at a borrower's complete situation, and then structure a transaction with several credit enhancements. These enhancements might include the guarantees of the principals, a cash security deposit and an all-asset lien against the company.

In addition to high-risk lenders, there are high-risk leasing companies that target companies with negative cash flow. These lessors approach their transactions in much the same way as high-risk lenders, except they structure lease transactions (usually with the lessor retaining ownership of the underlying leased asset).

For taking the additional risk, most secured lenders and lessors look for higher transaction yields commensurate with the risk. It is common for high-risk lenders to require loan rates several hundred basis points above those of traditional bank lenders. A few lenders and lessors take even greater risk. They are willing to trade off the downside protection of additional collateral for an opportunity to receive larger yields. They seek yield enhancements in the form of stock warrants, royalty payments or other equity participation. These yield enhancements are often an acceptable price to pay for borrowers with no where else to turn.

Where do you find lenders and lessors who serve companies with negative cash flow? Look for sub-prime lenders or ones holding themselves out as high-risk lenders. A good way to find these lenders is through referrals from bankers, accountants, attorneys and other business colleagues. In many markets, finance brokers actively bring borrowers and high-risk credit providers together. Also, a good place to check is your industry trade association and the trade associations for lenders. A last place to check is online. A Google search of sub-prime lenders or lessors specializing in specific asset categories, high risk business lenders, or high risk leasing companies will usually turn up quite a few providers.

If your company develops negative cash flow, this set-back is not an automatic sentence to corporate purgatory. With a compelling story and the ability to muster attractive collateral or sufficient credit enhancements, you can probably attract lenders willing to assist your firm. Launch an effort to identify these lenders, be prepared to tell your company's story, and be prepared to negotiate.