Strategic Negotiation Buys SaaS Company Valuable Time with Lenders

An NYC venture capital-backed SaaS company missed its financial covenants with its lender. In addition, the company was running out of cash. Of course, violating covenants was a clear sign the business was not performing well, but the way a company deals with its lender in this situation can be a key factor when the bank decides whether to take tough action or to work with the borrower.

 

The first thing a company in this situation does is prepare a 13-week cash flow to show how the company will be able to operate in the short term.

 

Next, it needs to prepare a detailed, thoughtful plan to show the lender how the business plans to get back into compliance.

Facilitate Negotiations, Design a Path Forward

As the Company’s outsourced CFO, and after some back-and-forth between the bank and the company’s investors, we were able to negotiate a settlement that bought time for the CEO and the board to raise additional equity, which allowed them to repay the bank and avoid default and liquidation.

 

Banks are always concerned when borrowers breach their loan covenants, but they have dealt with situations like this many times and do not necessarily push the “eject” button right away. First and foremost, a lender wants to know, how much additional funding it will take to get the company back on track.

The answer must be based on detailed forecasts backed by data and analyses, not on a visionary CEO’s optimism and gut feelings. A bank may be willing to help a business plug its funding hole by modifying loan terms and even lending more, but it will want to see the company’s investors invest additional capital. It will want to see cost-cutting plans and may even want to see there is a plan for how to sell the company if a turnaround is unsuccessful over a reasonable but fairly short time period.

 

We expect that some companies will not see a benefit from reopening the economy. Banks are expecting that, too, and they may not be interested in taking tough action right now – keeping companies alive may be better than the alternative for the bank and for the economy.

 

In fact, experience from the 2008 financial crisis taught us that companies that miss covenants but have adequate liquidity are unlikely to be in a lender’s crosshairs. HOWEVER, companies that have violated covenants, have a liquidity problem and DON’T HAVE A PLAN are going to be in a tough spot.

 

How G-Squared Helps Businesses with Lender Relationships

That’s where G-Squared can make a big difference. Banks can recommend or even require borrowers to get the kind of help G-Squared provides, as a condition of working with the company to cure its covenant violations rather than triggering a default.

G-Squared knows how to speak the bank’s language and knows what a lender looks for when making these decisions. Of course, our goal is always to keep the business in business and to support the company founders in pursuing long-term profitability.