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Financing in times of crisis, how to identify the opportunities?
Non-traditional financing, an alternative for companies.
Six months after the beginning of the pandemic, many companies in Mexico have been affected, however every crisis brings great opportunities. It is well known that the companies with liquidity to start new projects will be the winners.
Six months after the beginning of the pandemic, many companies in Mexico have been affected, however every crisis brings great opportunities. It is well known that the companies with liquidity to start new projects will be the winners.
The Bank of Mexico cut its benchmark interest rate to 4.5% on September 2020, its lowest level since 2016. This makes the cost of money lower, making investment projects more profitable. Even more interest rate cuts are expected. Hence, this is a good moment to obtain long-term loans at a fixed rate.
In spite of the decrease in the TIIE, the spreads (the differential rate above the TIIE) established by the banks have increased between 1.0% and 3.0%, depending on the institution and the financial situation of the company that requires the loan.
The increase in the rate is due to the growth in the banks’ non-performing loan portfolio, and the risk perception of the companies/country. In addition, the financing access for new clients or projects is very restricted. Banks have been tightening their acceptance criteria and the risk levels that they are willing to take.
There are non-bank financial institutions that are very active supporting new profitable projects. Unlike traditional banking, where the authorized loan is based on the certainty of the future cash flows, these non-traditional financing institutions, do not base their decision that much on the historical financial structure of the companies.
These are structured loans where the payments are adjusted to the project. Where the period can be managed between 3 and 10 years. The leverage level is higher than what traditional banking normally grants (max 3.5 times cost of debt vs EBITDA).
Likewise, the financial cost will depend on the type of project. In these cases, by assuming a greater risk than the traditional banking, rates are usually higher.
This type of financing is ideal for buying a competitor, buying the stake of a shareholder, accepting new projects (with contracts as a source of payment) larger than the historical payment capacity of the company. Also, this funding can be used to restructure liabilities.
Depending on the project and the type of guarantee (contracts, accounts receivable, inventory, etc.) there will be a non-bank financial institution to look for. They can work as a complement for the traditional senior debt.
If you need support in choosing the best non-conventional financing for you, we can perform a free financial diagnostic to assess how best to accelerate your growth.
This article was written by Victor Calderon, CEO and Founder of ArCcanto. Mazars has a strategic alliance with ArCcanto.
ArCcanto is a consulting firm, specialized in corporate finance and non-traditional financing. ArCcanto has been a strategic ally for companies during the last 16 years, that facilitates the growth of these until they are sold, merged or go public. If you want to know more about our partner go to their website here.
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