Continuation plans: how do you fund the cash the business needs?

Continuation plans: how do you fund the cash the business needs?

For a business in French judicial reorganisation, the court’s approval of a continuation plan is a turning point. It sets out how existing debts will be repaid and confirms that the business can keep trading.

But it does not create any cash.

A business can have its debts spread over several years and still be short of the cash it needs to buy raw materials, fund orders, rebuild stock or maintain its equipment.

The risk is a plan that works on paper but cannot be delivered for lack of money.

So when the plan is being prepared, one question has to be answered: how will day-to-day operations be funded while the business gets back on its feet?

A continuation plan does not pay for day-to-day trading

A continuation plan (also called a reorganisation plan, or plan de redressement) is designed to keep the business going, protect jobs and settle its existing debts.

It can spread debt repayments over several years. That takes the immediate pressure off past debts, but it does not fund what current trading requires.

And the business still has to pay for:

• purchases and supplies;

• wages and running costs;

• working capital;

• equipment maintenance;

• essential investment;

• the costs of fulfilling orders;

• the first plan instalments.

The plan buys time. The business still needs enough cash to turn that time into a real recovery.

A pick-up in trading can increase the need for cash

When orders come back, it is usually seen as good news. Yet it can push up funding needs for a while.

Before it is paid for a sale, the business often has to buy raw materials, build up stock, cover production costs, deliver to the customer and then wait for payment.

The longer the operating cycle, the more cash the restart absorbs.

This creates a paradox: the order book improves while the cash position gets worse.

Forecast revenue is not enough to show that the plan is viable. Every sales assumption has to be turned into cash in and cash out, on realistic timings.

Break the need down rather than ask for a lump sum

Simply saying “we need cash” does not tell a funder enough to understand the situation.

The amount should be broken down by purpose and timing. There are usually three distinct needs.

Stabilising operations

The first is to cover the costs the business cannot do without: key suppliers, wages, maintenance, energy, transport and keeping production running.

This cash is often needed straight away. Its job is to stop an operational setback from derailing the recovery before it has had a chance to work.

Funding the restart

The second is funding new orders and working capital.

This may mean buying raw materials, rebuilding stock, pre-financing production or bridging the gap between delivery and customer payment.

It should be tied to identifiable orders, contracts or cash flows.

Meeting the plan instalments

The third is the instalments due under the continuation plan.

These come on top of running costs and the repayments on any new financing. The whole package must remain affordable once all of these are added together.

A solution that funds the restart but makes the first plan instalments impossible to meet does not solve the problem. It only puts it off.

Building a credible cash flow forecast

A forecast profit and loss account is not enough to gauge how much funding is needed.

A business can return to profit and still run out of cash. When the money moves matters as much as how much moves.

The work should rest on a cash flow forecast that is updated regularly and covers, in particular:

• expected receipts from each major customer;

• the payment times customers actually take;

• payments due to suppliers;

• wages, tax and social security contributions;

• stock requirements;

• essential investment;

• plan instalments;

• repayments on the new financing;

• a safety margin.

The forecast should also be tested against less favourable scenarios.

What happens if a major customer pays two weeks late? If stock moves more slowly than expected? If margins come in below plan? If the sales recovery takes three months longer?

Credible financing has to absorb a reasonable setback. It cannot depend on the best case alone.

Making the need clear to a funder

A specialist funder will want to know exactly:

• how much is needed;

• when the money is needed;

• what it will be used for;

• how long it is needed for;

• which assets or cash flows can support the deal;

• where repayment will come from;

• what risks could knock the forecast off course.

How well this is presented has a direct effect on how the case is judged.

A general request to “support the continuation of the business” is hard to assess. The need becomes much clearer when it relates to something specific, such as stock backed by documented orders, advances against customer invoices or financing secured on identifiable equipment.

The aim is not to dress up an emergency. It is to show exactly what needs funding and how the money will be repaid.

What options are available?

When the traditional banks cannot increase their exposure, a number of specialist solutions can be considered:

• receivables finance;

• inventory finance;

• finance secured on machinery or equipment;

• sale and leaseback;

• refinancing of a property asset;

• secured private debt;

• bridge financing linked to an order or an asset sale.

These solutions are not interchangeable.

Their cost, term, security and repayment conditions must fit the business’s outlook and the plan instalments.

Owning an asset does not mean it can be financed. Its ownership, real value, saleability and any existing security all need to be established.

An asset can be vital to the business and still be worth little to a lender. Conversely, a well-documented asset can make the case easier to understand when the usual financial ratios look weak.

Start on the financing early

Timing goes a long way to deciding which options are open.

A funder needs to review the financial position, the forecasts, the assets, the security and the constraints of the proceedings. That takes time.

If the search starts only days before the cash runs out, far fewer funders are able to act. Terms usually get tougher and the business loses negotiating power.

Funding for operations should therefore be prepared alongside the continuation plan, not after it has been approved.

Starting early leaves time to put a figure on the need, gather the documents and approach funders in a sensible order.

Bringing the financial and legal sides together

In judicial reorganisation, a financing deal cannot be put together in isolation from the proceedings.

It has to be reviewed with the court-appointed administrators, the creditors’ representative and the lawyers involved. In particular, they need to check the rights of existing creditors, the security available and any approvals required.

The financial adviser’s role complements theirs: building the cash forecast, identifying the assets and cash flows that can be used, shaping the funding request and running the approach to lenders.

Working together this way avoids a financially attractive solution turning out to be legally impossible or at odds with the commitments in the plan.

Conclusion: funding the time a recovery needs

A continuation plan can give a business the time it needs to get back to a viable footing. But that time has to be paid for.

A sound case rests on four things: a precisely costed cash requirement, a realistic operating forecast, well-documented assets or cash flows, and the ability to repay alongside the plan instalments.

So the task is not just to reschedule the debts. It is to give the business the financial means to deliver its recovery.

The earlier this thinking starts, the more freedom the business has to choose who it works with, put together a coherent solution and keep trading.