With back-to-school season fast approaching and the holiday shopping season not far behind, retail suppliers and other small to midsized businesses should take steps to develop refinancing strategies for their trade credit and other loans to ensure that they have adequate liquidity, according to Grant Thornton LLP’s Corporate Advisory and Restructuring Services.

“Distress in the banking sector, the weak economy and the high debt loads many retailers carry have made trade credit a precious commodity,” said Grant Thornton CARS partner Ben Gonzalez in a statement.

Refinancing, as a percentage of total new issue leveraged loan volume, is rising. In the second quarter of 2009, approximately two thirds of new deals were a result of refinancing, compared to 50 percent in the first quarter.

“Refinancing options are available, but finding a lender and obtaining approval in an increasingly competitive market can be a time-consuming process,” said Gonzalez. “Only a clearly articulated business plan backed by thoughtful financial analysis and credible performance targets can give lenders the confidence they need to take on new clients.”

These challenges were underscored by the results of the most recent Federal Reserve survey of senior loan officers, released in May. It found that large majorities of both domestic and foreign banks reported a reduced tolerance for risk as an important reason for tightening credit standards and terms on commercial and industrial loans. On balance, banks continued to trim lines of credit for both businesses and households.

According to Grant Thornton, there are several strategies prospective borrowers should follow to improve the odds of success in today’s climate.

“Step one is to craft a story that sells your business to a lender from their point of view,” Gonzalez said. “As you discuss your financial statements, operating strategy and competitive landscape, remember that lenders will be focused singularly on sources of repayment, collateral, their potential returns and alternative exit strategies.”

Other necessary components may include:

·    A five-year financial model that includes a forecast of both the balance sheet and cash flow statements, and for seasonal businesses, at least one year of financial projections prepared on a monthly basis;
·    A 13-week cash flow projection that allows lenders to assess the nuances of a business's cash collection cycle;
·    A “four walls” analysis that captures the true contribution margin of retail operations on a store-by-store basis; and,
·    Enterprise and asset valuations that focus on realizable values.

“Even with signs that the economy is bottoming out, there will still be tremendous uncertainty and anxiety weighing on consumers and lenders for many months to come,” said Gonzalez. “Credit is almost never available in a crisis or panic situation, so it pays to plan ahead.”

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