Financing inventory during a continuation plan

When business picks up after a continuation plan is adopted, the first item to consume cash is often inventory. Raw materials must be bought again, finished goods rebuilt and new orders fulfilled. And suppliers, wary after the proceedings, frequently demand cash payment.

Yet inventory is also an asset. Properly documented, it can serve as the basis for financing that keeps pace with the business.

How inventory-backed financing works

The financier makes available a facility whose amount is calculated on the value of eligible inventory, after applying a haircut. When inventory rises, drawing capacity rises; when it is sold, the facility is repaid from the collections.

Several forms exist:

• a pledge over inventory, with or without dispossession;

• third-party custody, where a third party physically controls the inventory on behalf of the financier;

• asset-based facilities combining inventory and receivables (borrowing base);

• transactional financing, backed by a specific order or contract.

Why it is relevant during a plan

Inventory financing offers two advantages in this context:

• it relies on an identifiable, saleable asset rather than on the company’s ratios, which still bear the marks of the proceedings;

• it is proportionate to the actual need: the company does not take on a fixed amount of debt, it draws on the value of its inventory as it goes.

It is therefore a natural answer to the restart paradox: the order book improves, but cash tightens because the company must buy before it can sell.

What makes inventory financeable

Not all inventory is equal. A financier will look in particular at:

• the nature of the inventory: standardised raw materials and standard finished goods are easier to finance than work in progress or made-to-order products;

• turnover: fast-moving inventory is less risky than old or dormant stock;

• traceability: reliable stock counts, an inventory management system and precise locations;

• resale value: the existence of buyers in the event of default, and a realistic haircut;

• third-party rights: suppliers’ retention-of-title clauses, existing pledges and consignment stock.

The value retained will always be lower than book value. Depending on the quality of the inventory, financing capacity may represent a significant or a very limited share of that value.

Points of attention linked to the proceedings

During the observation period, granting security over the company’s assets requires the authorisation of the supervisory judge (juge-commissaire). While the plan is being implemented, the financing must remain compatible with the commitments made and with any inalienability measures ordered by the court.

The new facility must also fit with the repayment of the plan’s creditors: the annual instalments come on top of repaying the new financing, and the whole must remain sustainable.

These matters are dealt with alongside the plan implementation officer and the company’s advisers, before approaching financiers.

Preparing the file

For a financier to reach a decision quickly, the company must be able to provide:

• a detailed inventory schedule by category, with valuation and ageing;

• twelve months of turnover history;

• the general terms of its main suppliers (retention of title);

• the order book and the sales forecast;

• a cash-flow forecast that includes the payments due under the plan;

• the judgment approving the plan.

Further reading: our page Inventory financing and our page Financing a continuation plan.

In summary

Inventory is often seen as a cash problem during a continuation plan. Properly prepared, it can also become the solution: financing that grows with the business and rests on an asset the financier can assess directly.