What is Exit Financing?
Reviewed by: Bruce Sayer
Exit financing is a type of funding provided to companies that are emerging from bankruptcy or restructuring. It serves as a critical financial lifeline, enabling these companies to transition smoothly from insolvency to stability. Exit financing typically involves loans or credit facilities arranged to pay off existing debt, cover operating expenses, and provide working capital for future operations. This financing is often structured to meet the unique needs of companies in recovery, offering them a fresh start and the means to rebuild their businesses.
How Exit Financing Works
- Assessment and Planning: Before securing exit financing, a company must develop a comprehensive reorganization plan. This plan outlines how the company intends to restructure its operations, repay creditors, and return to profitability. The plan is usually approved by the bankruptcy court and creditors.
- Identifying Lenders: Companies seeking exit financing typically approach specialized lenders who have experience with distressed businesses. These lenders assess the company’s reorganization plan, financial projections, and asset base to determine the feasibility of providing financing.
- Structuring the Loan: Exit financing is tailored to the specific needs of the company. It can include various forms of credit, such as term loans, revolving credit lines, or asset-based loans. The terms are negotiated based on the company’s projected cash flow, asset value, and overall risk profile.
- Approval and Funding: Once the terms are agreed upon, the exit financing package is approved, and funds are disbursed. This financing is used to pay off existing debts, cover operational costs, and provide the necessary capital to support the company’s post-bankruptcy operations.
- Implementation and Monitoring: After receiving exit financing, the company implements its reorganization plan. Lenders closely monitor the company’s performance to ensure compliance with the terms of the financing and the overall success of the reorganization efforts.
Benefits of Exit Financing
- Immediate Cash Flow: Exit financing provides the immediate liquidity needed to settle existing debts and operational expenses, enabling a smoother transition out of bankruptcy.
- Operational Stability: With secured funding, companies can stabilize operations, retain employees, and rebuild relationships with suppliers and customers.
- Creditworthiness Improvement: Successfully securing and managing exit financing can help improve a company’s credit profile, making it easier to obtain future financing under more favorable terms.
- Flexibility: Exit financing is often customized to fit the unique needs and circumstances of the company, providing a tailored solution that supports long-term recovery.
Example Scenario
Consider a retail chain, Fashion Forward Inc., which has been struggling with declining sales and mounting debts, leading to a Chapter 11 bankruptcy filing. After months of restructuring, Fashion Forward develops a reorganization plan aimed at closing underperforming stores, revamping its online presence, and renegotiating supplier contracts.
- Assessment and Planning: Fashion Forward’s reorganization plan is approved by the bankruptcy court and creditors, outlining a strategy for returning to profitability.
- Identifying Lenders: The company approaches a specialized lender experienced in providing exit financing to distressed retailers.
- Structuring the Loan: After evaluating Fashion Forward’s plan, the lender agrees to provide a $50 million exit financing package, comprising a $30 million term loan and a $20 million revolving credit line.
- Approval and Funding: The exit financing is approved, and funds are disbursed to settle existing debts, cover operational costs, and invest in the company’s online platform.
- Implementation and Monitoring: Fashion Forward implements its reorganization plan, closing underperforming stores and enhancing its online presence. The lender closely monitors the company’s performance, ensuring adherence to the financing terms.
Conclusion
Exit financing plays a crucial role in helping companies emerge from bankruptcy and regain stability. By providing the necessary funds to settle debts, cover operational costs, and support strategic initiatives, exit financing enables businesses to transition smoothly from insolvency to profitability. With the right exit financing in place, companies can rebuild their operations, restore stakeholder confidence, and lay the foundation for long-term success.
ABOUT eCapital
Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.
We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.
Cal Navatto
As a trusted financial advisor to private equity groups, middle-market executive teams and corporate restructuring professionals for more than 30 years, Cal is adept at originating, structuring and negotiating asset-based lending and invoice factoring credit facilities for businesses across the US.
Prior to joining eCapital, Cal held the position of Vice President - CIT/Commercial Services Group, a subsidiary of First Citizen's Bank. He has also served as Senior Vice President, Finance at UMB Bank and NewStar Business Credit and Vice President, Business Development at First Capital.
Cal received his Bachelor of Arts in Economics from Montclair State University.