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Navigating capital structures amid economic challenges
Amid economic challenges and rising costs, businesses facing Main Street loan maturities can explore flexible refinancing solutions and industry-specialized investors to navigate their capital structures effectively.
September 5, 2024 by Blas Escarcega — VP of Franchise Development, Pollo Campero
In the current economic climate, businesses face significant challenges with looming loan maturities, especially as Main Street loans from the COVID-19 era come due. Declining consumer traffic and economic uncertainty are pressing businesses to find viable financing solutions.
Current market challenges
Borrowers often assume that commercial bank options will be available to address refinancing needs when they arise; however, market uncertainty is causing banks to be more guarded in their lending practices. Banks remain cautious coming off last year's banking crisis, which manifests in tighter leverage tolerances and selective financing options based on brand strength.
Operating results aren't helping either. Consumers are pulling back, and discounting wars in certain categories are pressuring margins. This risk-off attitude is understandable given the unpredictable market conditions, with both banks and businesses waiting for signs of improvement. Unfortunately, 2024 is likely to remain challenging.
Interest rates are significantly higher than a few years ago, increasing the pressure on servicing capital structures and getting loan approvals. Even with previous expectations of declining rates, stubborn inflation suggests we may be stuck in this liminal stage for longer.
Higher rates put substantial pressure on the ability of businesses to service their debt. The cost of borrowing has increased, making it harder for companies to maintain their capital structures. This, coupled with market volatility and the upcoming election, creates a complex environment for refinancing and accessing new capital.
Main Street loans coming due and higher amortization
Initiated in 2020, the Main Street program offered favorable terms with low rates and payment deferrals. Now, three years in, the amortization period has started, requiring regular payments on the loan principal. This, combined with significantly higher interest rates, makes the overall cost of borrowing much higher. The result is that many businesses face debt service payments exceeding 20% of their loan balance, which can be unsustainable, especially for those with P&L headwinds.
Many business owners are caught off guard by this increase in debt service. The combination of amortization and high interest rates has put immense pressure on businesses, with debt service payments consuming a large portion of cash flow. This makes refinancing solutions urgent for many.
Financing options available to companies
Despite these challenges, businesses have various refinancing solutions to explore beyond traditional bank loans. Alternative lenders offer flexibility in amortization structures, cash interest deferral and hybrid debt/equity solutions, providing relief from high payments.
Businesses need to understand that they are not confined to the rigid structures of traditional bank loans. Once you move beyond the commercial banking world, there are many options and permutations available. Alternative lenders can tailor their financing solutions to fit the specific needs and goals of each business. This flexibility can be crucial in managing cash flow and maintaining operations during challenging times.
For instance, an amortization-light structure might involve paying only 1% or even 0% of the principal each year, compared to the 7.5% to 15% typically required by traditional loans. This significant reduction in principal payments can free up cash flow, allowing businesses to invest in operations and growth rather than being burdened by high debt service payments.
Additionally, alternative financing options such as "paid-in-kind" interest features can further alleviate the burden of high-interest payments. Instead of paying interest in cash, businesses can capitalize the interest, adding it to the loan balance. This can provide short-term relief and improve cash flow, making it easier for businesses to navigate tough economic conditions.
The key is to find a lender that meets your specific needs and goals. Unlike banks, which offer one-size-fits-all loans, alternative lenders tailor their solutions to what you aim to achieve, providing multiple structuring options. This flexibility allows businesses to create a financing solution that aligns with their unique circumstances and objectives.
The value in working with industry-specialized investors
Industry-specialized investors offer benefits beyond financial support. Their deep understanding of the business landscape provides invaluable insights and resources. Having an informed perspective helps handle business ups and downs, offering a steadier approach, especially after the volatility of recent years.
These investors also bring access to purchasing synergies, and opportunities for knowledge sharing within their portfolio companies. This collaborative approach leverages the collective capabilities of similar companies, offering a strategic edge.
Industry-specialized investors understand the unique challenges and opportunities within specific sectors. They can provide tailored advice and support, helping businesses navigate industry-specific issues and capitalize on growth opportunities. This expertise can be invaluable in making strategic decisions and achieving long-term success.
For example, an industry-specialized investor in the restaurant sector might have insights into supply chain efficiencies and operational best practices that can help a restaurant chain improve its performance. This level of industry-specific knowledge and support can make a significant difference in a company's success.
In addition, specialized investors often have extensive networks within the industry, which can open doors to new opportunities and partnerships. This network can provide access to resources and potential customers or partners that might not be available through traditional financing sources.
Refinancing solutions make success possible
In a challenging market, exploring alternative financing options and forming strategic partnerships with non-bank lenders can provide the support necessary to navigate these difficult times successfully. If your outlook for 2024 is challenging, these alternatives might offer the flexibility and support you need.
For businesses facing upcoming loan maturities and increased debt service, now is the time to explore these alternative financing options. By working with flexible lenders and industry-specialized investors, businesses can find the support they need to navigate economic challenges and position themselves for long-term success. Whether restructuring debt, securing new financing or simply looking to leverage industry expertise, there are options available to help you manage your capital structures and achieve your goals.
Navigating the complexities of today's financial environment requires flexibility, creativity and strategic partnerships. By leveraging the options available beyond traditional banking, businesses can overcome the challenges posed by Main Street loans coming due amidst higher amortization and a volatile economic landscape.
About Blas Escarcega
