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Business owners frequently shy away from non-traditional finance options, deterred by the perceived higher costs compared to traditional bank loans. While the rates may seem steeper at a glance, this narrow focus often blinds them to a far graver financial risk: the colossal opportunity cost of acting too late. As projects get stalled, credit lines dry up, and options vanish one by one, the financial bind tightens, often beyond repair.

This is a poignant case study illustrating the devastating consequences of delayed financial intervention.

An established plumbing contracting business operating in the state of Victoria had a reputation for handling several major projects each year, boasting an annual revenue of $20 million. However, the disruptions caused by COVID-19, supply chain issues, and inflation began to eat away at their profits and cash reserves.

Management took a Band-Aid approach, securing expensive short-term loans and seeking traditional bank financing. Unbeknownst to them, these banks would take their time only to eventually turn them down. Just as new, profitable projects were within reach, the company’s slow payment history led suppliers to cease credit, backed by their credit insurers marking the account as “stop credit.”

By the time the company turned to Hermes Capital—experts in funding special situations, including distress—the business situation had already undergone further deterioration. The short-term lenders, anticipating potential risks, had registered security interests. These interests mandated sizeable repayments, ballooned further by punitive interest rates. Fulfilling these obligations became a prerequisite for Hermes’ involvement, effectively barricading the path to financial relief.

The business now faced a vicious cycle, with the threat of insolvency looming larger each day. Their delay in seeking the right kind of financial help not only cost them their lifeline but led to a point of no return.

The cautionary tale serves as a stark reminder to heed the warning signs and act promptly. Waiting too long for financial intervention can set off a chain reaction that closes off options one by one. Hard decisions may be painful but delaying them can lead to an irreversible downward spiral. When the signs are there, act. The price of delay could be the very existence of your business.

What should a finance broker advising a business in this situation impress upon their clients?

1. Early Intervention is Key: The moment you notice financial warning signs, such as cash flow issues or strained supplier relationships, don’t hesitate to explore financing options like Hermes Capital. Early engagement may help avoid roadblocks like “stop credit” designations or unfavorable security interests from short-term lenders.
2. Be Cautious with Short-Term Lending: While short-term loans might seem like a quick fix, they often come with high interest rates and penalty clauses. Understand the full implications and ensure you have a clear path for repayment to avoid getting caught in a financial bind.
3. Assess All Financial Avenues: Before resorting to traditional bank loans, which may take a long time to process and even longer to approve, look for specialized financial institutions that cater to businesses in distress or undergoing changes. They may offer quicker and more flexible solutions.
4. Open Communication with Suppliers: Maintain good relationships with suppliers and be transparent about your financial situation. Negotiating terms or even simply keeping them informed can go a long way in securing your credit line for a longer period.
5. Develop a Contingency Plan: Always have a backup plan for worst-case scenarios, such as a sudden cutoff from suppliers or an unexpected hike in project costs. This includes having a pre-qualified list of alternative financial resources and knowing their terms inside and out to quickly pivot if needed.