Before Composition: Keeping Access to Credit Alive
For most companies a composition with creditors is not the first financial problem but a late stage of a deterioration in cash flow and debt service that began much earlier.
For most companies a composition with creditors is not the first financial problem but a late stage of a deterioration in cash flow and debt service that began much earlier. In this article we take the subject beyond the headline and turn it into a financial framework a decision-maker can actually use.
When does credit appetite start to fall?
Persistent limit overruns, short-term debt rising fast, deterioration in cheque and note performance, delays on tax and social security, lengthening collection periods and growing inventory can all be early warning signals to a bank.
Why is the 13-week cash flow critical?
A monthly or annual budget is not sensitive enough in a crisis. A weekly view shows on which date a gap will open for wages, tax, suppliers or a loan payment, and buys management time.
When should you talk to the bank?
Not after a payment has been missed, but the moment the gap is foreseen. The company should go to the bank with a realistic cash flow, the current debt maturity table, a list of assets and collateral, and an operational improvement plan.
When does restructuring make sense?
If the problem is a temporary maturity mismatch, extending the tenor can work. But if the operating model is producing continuous losses, deferring the debt alone can make the problem larger. Financial and operational restructuring have to be considered together.
What the board should be asking
What is the lowest cash level over the next 13 weeks? Which customer delay would trigger the crisis? Which asset can be turned into cash? Which cost can be deferred? On what date will which proposal be put to the banks?
Conclusion
A sound financial decision does not come from following a single ratio or a headline; it comes from comparing cash flow, total cost, risk, maturity and alternatives in the same table. Where the subject rests on a current regulation or campaign, the official terms should be confirmed before you act.
This content is general financial information. Current rates, campaigns, legislation, tax, incentives and market measures should be confirmed with the relevant official institution before any transaction or application.
- What do banks look at when lending to companies?
- Working capital and the cash conversion cycle
- How is a bank credit file prepared?
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