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bac k o ffic e Smart growth How to mitigate your financing risks when expanding operations By Craig Aderhold, Wisconsin Bank & Trust Loans Because manufacturing is capital intensive, most companies carry debt on their balance sheet — often in the form of term loans. Many manufacturing owners are seasoned When do you want your term to balloon? 4 3 2 Prof its Five years after the financial crisis hit, many manufacturers in Northeast Wisconsin are stronger than ever before, thanks to savvy management and adaptability. Now, many companies are considering expansion to pursue additional growth. Typically, expansions increase financial leverage, which in turn increases business risk. Business owners can address new and existing financing with risk mitigation in mind to preserve their ability to adapt to changing market conditions. This is analogous to managing other business risks, such as commodity price fluctuations, customer concentration, and business and seasonal cycles. Mitigating financing risk also helps protect the owner's family, since owners often make personal guarantees to obtain financing. Most Northeast Wisconsin manufacturers are owner-operated, without private equity backing or access to public debt markets, so they typically have limited cash resources available outside the business itself. A lack of deep pockets means it's especially important to plan and structure financing strategically. Following are risk-mitigation tips for both loans and lines of credit. 1 0 '09 '10 '11 '12 '13 '14 '15 '16 -1 '17 Year Ends -2 -3 entrepreneurs who have seen down times, and some have struggled to negotiate renewal terms with their banks when term loans come due. For example, consider a real estate loan taken for expanding operations. A typical loan for an expansion features a five-year balloon payment with a 20-year amortization. What if that balloon payment (a disproportionately large payment at the end of a loan term) happens to come due during a downturn when operations are struggling? The owner would be forced to renegotiate with the bank at the worst possible time, when it is unlikely another bank will offer financing. The lender could take steps such as increasing the interest rate, requiring the owner to put more capital into the business, or seeking additional collateral. Or worse, the lender could call the note and put the business in work-out/foreclosure. These problems can occur because entrepreneurs, who are optimistic almost by definition, haven't taken the time to explore other options. By taking that time, however, owners can help protect their businesses by creating a safety net and maintaining more control. In many cases, it is better to seek a loan with the longest possible maturity and amortization schedule. continued > w w w.in s i g h t o n m f g . c o m November 2013 • Most Northeast Wisconsin manufacturers are owneroperated, without private equity backing or access to public debt markets, so they typically have limited cash resources available outside the business itself. – Craig Aderhold / insight on manufacturing | 17