Navigating The Credit Crisis

This guest blog post originally appeared on the Austin Start-up Blog on October 14, 2008. The author, Ellen Wood, is the owner of the company where I work, vcfo, inc.

Ellen Wood is the co-founder and CEO of Austin based vcfo, inc. The firm specializes in operational finance and accounting, HR Solutions and recruiting services for companies of all sizes. She can be reached at 512-345-9441. www.vcfo.com.

The ongoing credit crisis is the major topic from Wall Street to Main Street in recent weeks. From business owners to employees, everyone is concerned about the long term effects of the current financial situations on their industry.

Many Austin based companies are wondering what tomorrow will bring for the early stage / start up environment and if there will be access to creative alternative funding sources in order to provide options in the face of unexpected liquidity challenges.

It is my belief that no segment of the economy will escape untouched. Many companies are not prepared to withstand significant changes to their debt facilities. Changes are already happening - ranging from cancelled facilities to changes in terms - to all forms of working capital credit including; term loans, revolvers, AR facilities, staged equity infusions, purchase order financing, and even factoring.

Anticipate the impact and begin to prepare immediately to weather the economic turbulence ahead for all sectors of the economy. If you feel you need help doing this, seek advice from professionals in evaluating the impact on your company. Evaluate your exposure, optimize your existing financing, and secure alternative funding sources if appropriate to your situation. Some specific things to pay attention to follow:

• Review carefully your loan documentation with special attention to covenants and what constitutes a material adverse condition.
• Update your forecast and project your covenant compliance under revised projection.
• Contact your banker proactively if you anticipate missing any of your covenants or other commitments, but be prepared to answer their questions and ideally to suggest whatever changes you feel you need to make to the facility.
• If you opened the company American Express Card then likely it is still relying on your personal credit even if multiple cards have been issued. You may not even be with the company any more. Make sure this liability is not your personal liability.
• Understand your personal liability for any debt instrument or lease arrangement.
• Anticipate that shareholder loans you may have made to your company may be restricted as to repayment.
• If you are working with a staged equity infusion agreement, review your milestones against current projections. Identify potential misses and suggest alternative terms.

As a survivor of the last significant downturn, I know first hand how unsettling this experience can be to a business owner. Tough times are painful but can also generate new opportunities. I encourage business owners to take a hard look at their companies and make the necessary changes to adapt to the changing environment. I’m confident the entrepreneurial spirit of Austin business owners will prevail through this current economic crisis