Unlocking Growth Through Financing

A closer look at the challenges the industrial sector faces, and how those may impact the ability to raise capital.

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The industrials sector is broad and diverse, covering a wide range of manufacturing and assembly capabilities. While the sector is poised for recovery and growth coming out of the pandemic, there are many obstacles and barriers that need to be addressed in order to achieve and sustain this desired growth. Companies looking to grow will likely need capital to do so.

Below, we take a closer look at the challenges the industrials sector faces and how those may impact their ability to raise capital. In these unprecedented times, having the right financing partner who understands what a company has been through can help unlock growth and promote innovation. 

The Challenges

When the pandemic set in a year ago, global economies came to a screeching halt and demand for most industrial goods and services stagnated. Most industrial companies saw their order volume fall and even if they were fortunate enough to have backlog to fulfill, keeping plants open during the early days of the pandemic was a challenge. 

Combined with the global transportation gridlock and increasing tariffs, there are very few industrial companies who went unscathed. Even those deemed ‘essential’ experienced wage increases (hazard pay) to encourage employees to leave the safety of their homes and face potential exposure to COVID at the plants. Ongoing revenue variability amplified existing liquidity issues putting small- and mid-sized enterprises at risk. 

Supply chain disruption was also a material factor impacting margins in many industrial companies throughout 2020. Key sub-assemblies were anything but ‘just-in-time,’ wreaking havoc on the rest of the assembly process,  resulting in a domino effect on the balance of the entire operation. Key suppliers took advantage of the situation, raising prices to all but the most loyal and largest of customers. As a result, management limited their focus to solving short term problems, unknowingly impacting margins in the near-to-medium term.  

There is a developing level of optimism in the fight against COVID as more vaccinations are administered and case counts subside. However, the lingering effects of the pandemic on the industrials sector continue with total industrials production figures on the decline. This brings up a concerning question for many companies who are seeking to raise capital in the wake of the pandemic. Will my bank lender be able to see through my company’s pandemic performance or will we be severely penalized in the credit review process?

It is important for companies to think “outside the box” for creative and flexible funding sources. Someone once said that “out of chaos and uncertainty comes greatness.” Many companies have used the pandemic to diversify their supply chain, vertically integrate production, enter into volume purchase commitments to lock in supply and prices and/or made overtures towards M&A transactions with competitors.

All are done in an effort to capitalize on the disruption of 2020 and facilitate revenue stability and possibly growth. Each of these strategic actions requires capital now or sometime in the near future. As management looks to the next phase of the business, they need to understand the factors that shape performance and facilitate long-term growth.

A crucial component in creating this trajectory can be finding the right lending partner who will grow with you and work to understand the intricacies driving your business and sector. While somewhat intuitive, in selecting a new capital partner there are a number of questions to ask:

  • Is this the type of lender who has the willingness and ability to support my company through good times and bad or will they pressure a refinancing at the first sign of under-performance?
  • Does the lender have the product offering to best align with my needs and asset mix (ABL lines, term loans, equipment finance, etc.) or will they push me into a credit product that best fits their needs?
  • Is the lender experienced in my particular sector or are they willing to invest the time to educate themselves to fully understand what drives the business and industry?
  • Does the lender have the capital base to scale with the company as it grows either organically or through acquisition?

When seeking a new lender, management must self-assess to evaluate what attributes the company possesses that make it an attractive candidate to appeal to prospective lenders. Below are several factors that any capable lender will consider when performing a credit evaluation of an industrial business, particularly coming out of the pandemic:

  • How was the company impacted by the pandemic and how did they respond?
  • If the company was affected by COVID, were the impacts short term in nature do they reflect a permanent shift in the cost structure?
  • Has the pandemic altered the competitive landscape of the business or the sector in general?
  • Does the company have multiple sources/channels in their supply chain should one become unattractive or unavailable?
  • Does the company have operational optionality to be able to flex work force or facility location to respond to future disruptions in supply chains, labor force or volume or pricing variability?
  • How has the outlook changed as a result of COVID and what has the company done to adjust, if anything?

 Whether we want to believe it or not, all companies are vulnerable to disruption. This can be in the form of a malware attack, extreme weather, labor strikes, raw material price spikes and, of course, a pandemic. Other than the obvious profit and cash flow trends, one major indicator that we look for as a lender is a company’s operational flexibility and optionality. We ask ourselves, “Does this borrower have the ability to adjust operationally to avoid meaningful disruption or margin compression?”

Those that embrace this operating thesis essentially possess a protective hedge against unforeseen vulnerabilities, such as the pandemic, and thrive when others are struggling to survive.

Financial solutions for successful industrials need to be tailored to your individual company needs. Lenders have the ability to address challenges head on and can help remove barriers to success by unlocking capital vital to expansion and growth through a deep understanding of your business. Solutions that can be implemented include creative asset-based lending solutions, cash-flow term loans and equipment specific financing, all of which can be tailored to meet the capital demands of today and the liquidity needs of tomorrow. 

 

John Felix has served as Managing Director of White Oak Global Advisors, LLC (WOGA) since 2017. For more information, visit www.whiteoaksf.com.

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