Funding your inventory under a continuation plan

Once a continuation plan is in place and trading picks up, inventory is often the first thing to absorb cash. You need to buy raw materials again, rebuild finished goods and fulfil new orders. And suppliers who were caught out by the proceedings often insist on cash up front.

Yet inventory is also an asset. Well documented, it can support financing that moves in step with the business.

How inventory finance works

The funder provides a facility sized on the value of eligible inventory, less a haircut. As inventory grows, so does the amount you can draw. As it is sold, the facility is repaid from the sale proceeds.

It comes in several forms:

• a pledge over inventory, with or without the goods leaving your control;

• third-party custody, where an independent party holds the stock on the funder’s behalf;

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

• transaction finance, tied to a specific order or contract.

Why it suits a business under a plan

In this situation, inventory finance has two advantages:

• it relies on an identifiable, saleable asset rather than on financial ratios that still reflect the proceedings;

• it matches the actual need: rather than taking on a fixed amount of debt, the business draws on the value of its stock as it goes.

That makes it a natural answer to the restart paradox: the order book is improving, but cash is getting tighter because you have to buy before you can sell.

What makes inventory fundable

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

• the type of stock: standard raw materials and mainstream finished goods are easier to fund than work in progress or made-to-order products;

• turnover: fast-moving stock carries less risk than old or slow-moving stock;

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

• resale value: whether there are buyers if things go wrong, and a realistic haircut;

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

The value a funder uses will always be below book value. Depending on the quality of the stock, the amount you can raise may be a large share of that value or a very small one.

Points to watch under the court procedure

During the observation period, granting security over the company’s assets requires the approval of the supervising judge (juge-commissaire). Once the plan is being carried out, any financing must remain consistent with the commitments made and with any restrictions on disposing of assets ordered by the court.

The new facility also has to fit around payments to the plan’s creditors. The annual instalments come on top of repaying the new money, and the total must remain affordable.

These points should be worked through with the plan supervisor (commissaire à l’exécution du plan) and the company’s advisers before any funder is approached.

Preparing the file

For a funder to give a quick answer, the business should be able to provide:

• a detailed stock list by category, with values and ageing;

• stock turnover over the last twelve months;

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

• the order book and sales forecast;

• a cash flow forecast that includes the plan instalments;

• the court judgment approving the plan.

To find out more, see our page Inventory finance and our page Funding a continuation plan.

In short

Under a continuation plan, inventory is often seen as a drain on cash. With the right preparation, it can become part of the answer: financing that grows with the business and rests on an asset the funder can assess for itself.