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3 Ways to Get Capital in an Industry Downturn

3 Ways to Get Capital in an Industry Downturn

When an economy lags, even established industries are affected. Economists have noted a widespread downturn among conventional industries, leaving scores of businesses in need of capital in order to keep going.

Frequently, this happens to established businesses – for example, the oil industry. In April, the New York Times reported that 2016 marks the steepest oil downturn since the 1990s, characterized by plunging earnings, bankruptcies, and approximately 250,000 jobs lost. That’s a bleak picture, and with the price of a barrel falling by 70 percent over the last two years, it may get even worse. Those in the know are saying it could be years before oil prices re-stabilize at $100 per barrel.

When businesses suffer from a downturn that plagues their industry, the best way to weather the storm is to inject new capital as quickly as possible. Here are some ways to do it:

Apply for a Bank Loan

This would seem like the go-to solution, wouldn’t it? But there’s a caveat that companies should be aware of: If a specific industry has worn out its welcome with the banks, then the prospects for a traditional loan don’t always look good. To use the oil industry example again: CNN reported on April 14, 2016 that “bad oil loans are piling up at big banks,” and stated that oil company loan applicants “look increasingly shaky, given the crash in crude prices.” The conclusion? “Big banks are bracing for more oil loans to implode.” If an industry has suffered a noticeable downturn – whether that industry is crude oil, consulting or construction – then a bank loan may not always be an option.

Put Up Collateral

From equipment and machinery to buildings and land, any fixed asset that a business owns outright is possible collateral from which they can extract capital. One final oil industry example: Using their free and clear property as collateral, I once worked with an oil company in Utah to inject $510,000 of working capital within seven business days. Another aspect of the transaction worth noting is the 65% loan-to-value ratio, which gave them a loan for more than half the value of the property. For a company toughing out an industry downturn, that kind of capital can be highly valuable – especially when it funds so quickly.

Factoring Accounts Receivable

If a company has a significant volume of accounts receivable, it may be possible to sell those accounts to a factoring firm. Using alternative financing, established entrepreneurs can gain fast capital this way, and often relish the opportunity to turn over a portion of their invoice collections. It allows them to achieve two objectives:

  1. Getting fast capital by selling their invoices
  2. Freeing up their time, because they are no longer expending resources on chasing down payments.

Factoring may not work for every business, but it’s always worth inquiring about if you need a quick capital injection.

Getting new capital is the key to weathering a downturn, and there are many ways to do it. To determine how to best acquire the capital they need, business owners should examine the criteria in each of these methods closely and act accordingly.

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by Jeff Brannon // Managing partner of Solve Capital Group. He can be reached at (949) 356-6601, or by e-mail at [email protected]

Opinions expressed by contributors are their own.