A period of disappointing turnover or rising costs can put cash flow under pressure. This article discusses what financing options exist during a turnaround and how best to prepare for conversations with funders.
Every business experiences periods of headwinds from time to time: losing a major client, rapidly rising purchasing prices, or an investment taking longer to pay off than planned. When this puts cash flow under structural pressure, acting quickly and clearly is more important than waiting to see if the problem resolves itself.
This article discusses the key financing options during a turnaround or restructuring, and how best to conduct discussions with existing and new funders. For the broader foundation of working capital management, we refer to the working capital page.
First diagnosis, then financing
Before seeking financing to bridge a tight cash flow, it is essential to pinpoint the underlying cause. Is the problem temporary, for example due to a seasonal peak or a one-off setback, or is it structural, such as a permanently lower margin or an outdated business model?
This diagnosis determines which financing is appropriate. A temporary liquidity issue can be solved with a bridging loan or additional working capital headroom. A structural problem requires a restructuring of business operations first, and only then tailored financing to match that new situation.
Early identification and communication
One of the greatest risks with tight cash flow is waiting too long before informing funders. Banks and other lenders generally appreciate it when a business owner sounds the alarm in good time with a well-substantiated case, rather than only reporting that a payment will not arrive on time.
An early conversation creates room to explore solutions together: a temporary adjustment of the repayment schedule, additional working capital headroom, or a bridging facility pending, for example, a debtor payment or tax refund. The later the signal arrives, the more limited the options usually are.
Instruments for a temporary cash flow dip
- Temporary extension of the current account overdraft facility to bridge a short period
- Factoring to accelerate the collection of receivables and shorten the cycle between delivery and payment
- Deferral or restructuring of existing repayment obligations in consultation with the bank
- Sale-and-leaseback of business assets to release liquidity on a one-off basis without losing the use of those assets
- Consultation with the Belastingdienst regarding possible deferral of payment in the event of temporary liquidity issues
Restructuring for a structural problem
When cash flow problems are structural in nature, additional financing only makes sense if it is combined with adjustments to business operations: cost reductions, a review of the product portfolio, parting with loss-making activities, or an adjusted pricing policy. Funders will also typically demand this before being prepared to provide new funds.
In some cases, a broader refinancing of existing debt is necessary, extending maturities or adjusting interest charges to reflect the business's new, realistic earning capacity. See the page on refinancing for more explanation on this.
The role of a restructuring plan
A well-substantiated restructuring plan is often the key to getting funders on board. This plan outlines which measures are being taken, within what timeframe, and what the expected impact on cash flow will be. Without such a plan, it is difficult for a funder to assess whether additional financing truly contributes to recovery, or merely defers the problem.
External guidance, for instance from an interim finance manager or an adviser experienced in restructurings, can help here. This not only brings additional expertise, but also gives funders greater confidence that the plan has been objectively modelled.
Calculation logic for a liquidity forecast
Draw up a liquidity forecast for the coming months based on conservative assumptions: calculate using the lowest realistic turnover expectation and the highest realistic cost item. Map out the moment at which the cash position is expected to turn negative without intervention.
This outcome determines the urgency and the scale of the required bridging facility. A forecast that balances only under optimistic assumptions gives a false sense of comfort and rarely convinces a funder; therefore, work with a realistic scenario alongside a pessimistic one.
Concrete next steps
- Draw up a liquidity forecast in the short term featuring both a realistic and a pessimistic scenario
- Determine whether the issue is temporary or structural, and choose bridging or restructuring accordingly
- Contact your bank or funder in good time, even if you do not yet have a concrete solution
- For a structural problem, develop a restructuring plan with concrete measures and a timeline
- Consider external guidance for a major restructuring to substantiate the plan objectively
Frequently asked questions
- When should I inform my bank about tight cash flow?
- As early as possible. Timely and substantiated communication leaves more room for joint solutions than waiting until a payment has already been missed before notifying the bank.
- Is new financing always the solution to a liquidity problem?
- Not always. For a structural problem, financing is only meaningful in combination with operational adjustments. Without these changes, additional financing will not solve the underlying issue and the debt burden may increase further.
- What should be included in a restructuring plan?
- A restructuring plan sets out the concrete measures to be taken, the timeframe within which they take effect, and the projected impact on cash flow. A substantiated, conservative liquidity forecast forms part of this.