Restructuring measures in relation to debtor finance
In our previous posts on restructuring measures, we focused on changes to company operations and fixed assets. The next category of restructuring measures includes changes regarding the financing of the debtor. These are intended to ensure that the debtor has access to money in the short and long term.
Types of financing
Short-term financing is intended to guarantee the company’s liquidity. It will thus enable it to carry out its operational activities. Long-term financing, on the other hand, will ensure the continuation of operations and the possibility of growth. This can be done through internal and external investments.
Sources of raising money can also be divided according to the criterion of their origin into own and external financing.
However, it must be remembered that in the case of restructuring, obtaining financing is significantly more difficult. This applies to both short-term and long-term financing. However, it is not impossible. However, cooperation between the court supervisor (administrator) and the debtor is necessary. It should also be taken into account that the debtor will most likely have to purchase assets and services on a prepaid basis, especially in the first months after the opening of restructuring proceedings.
Three possible actions for short-term financing can be listed:
1.Optimising net working capital management.
Initial operation based on prepayments is the basis for rebuilding the credibility of the debtor in the eyes of the counterparties. The next step is to try to obtain so-called trade credit. For this to be possible, it is often necessary to negotiate with individual counterparties. On the receivables management side, a good solution may be the conclusion of an receivables factoring agreement. However, it should be remembered that in the initial phase this will involve higher fees.
2. Changes in inventory management.
The need to make prepayments forces the debtor to change its approach to inventory management. Most often, it also leads to a reduction in the level of inventories held in order to increase their turnover. Optimisation in this area frees up money that can be used for other expenses.
3. Monitoring bad debts and recovering VAT from invoices not paid by contractors.
In the restructuring process, the debtor’s debtors should also be kept in mind. Effective collection of their own receivables can provide a significant cash injection. In practice, the most problematic is the collection of receivables from entities that are also creditors of the debtor.
In contrast, there are two actions for long-term financing:
- Increase equity.
To increase equity, companies can either increase share capital or increase contributions from existing shareholders. The admission of new shareholders can also be an effective solution. However, attention should be paid to the possibility of converting liabilities into share capital (shares) as part of an arrangement. In this case, the existing creditors become shareholders of the debtor.
2. New market financing.
This type of financing is significantly more difficult to obtain in the course of restructuring, especially at the beginning, especially in the case of private financing. An alternative is to raise capital through shareholder loans. In addition, the debtor may benefit from public funding (e.g. support offered by PARP or ARP). This type of financing is often directed to entities in a difficult economic situation. Therefore, more risk is allowed than in the case of private financing. Private high-risk financing has not yet developed strongly in Poland.