Tips to Financially Weather Climate Events

PROFIT MASTERY

By John Felix

Weather events have proven to cause financial disruption to a wide range of companies across nearly every industry and fabricating and metalworking is no exception. As we approach the end of 2021, companies around the United States continue to be directly and indirectly impacted by climate-related events, such as the wildfires raging in the West, while the states around the Gulf of Mexico and the Eastern Seaboard are in the middle of a potentially record-breaking hurricane season. And the South still faces aftereffects from unprecedented ice storms earlier this year.

There no longer appears to be a region that is assumed to be risk-free and protected from natural disasters. While the next disaster may be unknown, business leaders do know that crossing-fingers is not an effective preparation strategy, but many may not know what they can do to set their business up for financial success even if a weather disaster strikes.

Below are a few tips and strategies on how companies can financially prepare for the next unexpected climate event to ensure they come out on top:

1. Keep your options open: We estimate that many of the companies most affected by recent climate events likely did not have the option of a second manufacturing facility or alternative supply chain arrangements. Had they had the foresight, maybe they could have shifted gears and moved raw materials or found a different source for product assembly. Companies that have these options and those with diversification may be able to better shift on the fly or just adapt to disruptive circumstances whether it be due to weather or a supply chain disruption.
   By leveraging your current cash flows and future revenue streams via backlog, a term loan lender might be able to facilitate a number of initiatives from facility expansion to acquisition. By diversifying products, customers, and geographies you may better insulate your business from the certain future one-off events that could lead to the cash crunch.
   Having a contingency plan for all areas of the business that could be adversely disrupted by a natural disaster may help set the company up for a smoother pivot should the need arise.
2. Don’t push pause on innovation: A business that is open to embracing newer technologies that solve for the demands of partners, customers and governmental entities may be better positioned for success. Small and medium enterprises (SMEs) play a critical role in keeping the economy and supply chain moving. However, in our opinion, many businesses are still not aligned with technology or technical solutions, lack awareness of the impact of digital transformation, and therefore might struggle with adoption of the Industrial Internet of Things (IIoT) solutions and use in operation. Legacy companies that are reluctant to change could likely continue to face severe headwinds going forward.
   Often, the technology overhauls needed to stay competitive do not come cheap. It is important for many companies to have sufficient access to capital, which is essential to appropriately evaluate investment opportunities in technology. Keep in mind that private credit markets might provide tailored, flexible financing structures and solutions in amounts that commercial banks may not be able to facilitate. The right capital investment at the right time, as well as choosing strategic and creative lending partners who understand the borrower’s business, may be the difference between success and failure for many companies.
3. Don’t underestimate secondary impacts: In addition to the obvious physical damage and operational disruptions that climate and weather-related events may cause, remember to consider and plan for what secondary impacts on margins may be. For example, increased energy costs often follow these types of events. If not done already, consider embracing alternative energy sources like solar. Another option that is increasing in popularity is moving to another geographic region with lower fixed costs.
4. Get educated on your financial options before disaster strikes: As we emerge from the pandemic, we anticipate capital projects — whether maintenance- or growth-oriented — could be scrutinized by prospective lenders who may consider a company’s 2020 performance and penalize the company for under-performance during the pandemic. This may seem unfair, but due to regulatory oversight, many bank lenders may see no choice but to “average down” the last three years earnings when making their credit decision, which could result in lower loan amounts and/or higher rates and undermine the loan’s maturity schedule.
   It is important for executives to look beyond traditional sources of capital such as regulated commercial banks. The private credit markets can be capable of lending in flexible structures and amounts unavailable through the commercial banking market.
5. Make smart use of debt financing to weather a cash crunch: The first step is assessing the capitalization of your business. Typical contingency plans to help manage capital for businesses usually follow events like natural disasters, cyberattacks and power outages, among others. Leadership should consider the optimum liquidity or cash plus revolving loan availability to manage the day-to-day working capital swings as well as build an adequate cushion for one-off events.
   In addressing liquidity needs, managers should understand how to maximize availability through effectively leveraging their balance sheets. Not all asset-based loans are created equally and finding the right lender that ascribes the most value to your business’ assets may allow you the operating margin you need to weather temporary challenges.
6. Maintain a good relationship with a reputable lender in it for the long haul: Time can be of the essence when an unexpected financial hardship occurs. Having a lender on standby who knows your business and can help you with financial capital can often be the difference between navigating a proverbial storm or being forced to save a sinking ship.
   Additionally, it is important to work with a lender that takes a long-term approach to providing capital, flexibly and creatively, to ensure the appropriate financing meets the true financial needs of a business. Otherwise, lenders that are overly restrictive may ultimately set the borrower for failure.
7. Out of chaos comes opportunity: For companies that are appropriately capitalized and have access to capital — equity or debt — there can be tremendous opportunity to better position themselves going forward. Whether through M&A activity, vertical integration, manufacturing capacity expansion, relocations, incremental facilities, or construction taking place, being financially prepared may help ensure that even if disaster strikes, or strikes again, the company may not be as negatively impacted.

Right now, there is readily available capital to support preparedness projects, and we believe it is a good time to reevaluate where your business is, what it can do to plan for unexpected events and how you may be able to leverage financing to speed up supporting projects.

The right debt financing starts with the right lender. Just as every business has its own nuances, so do many of the bank and non-bank lenders operating today. When exploring options, we believe it is important to understand each of the lenders’ experience in your space, their risk appetite, and their own sources of capital to ensure they have the appropriate qualifications to meet your needs.