Everyone knows the difficulty faced by the Vir Abhimanyu
in epic Mahabharata. In his biggest war challenge what he was not knowing was
how to exit from the Chakravyuh. Well, Abhimanyu was to follow that suit as the
destiny had written that great end for him. What about the Working Capital (WC)
lender? Lord Almighty has given a better choice to him if he is well planned
and can dare to deviate from the tradition. I write this note for those who would
like food for thought to innovate.
The exit strategy for a business is as important as
entry, if not more. Working capital
funding is sort of short term finance. Generally the WC lines provided under
the scheme are for one year period. It is experienced that with the growth of
the borrower’s business, his requirement for WC assistance keeps on increasing.
Depending on the performance/payment records, generally the lender supports the
borrower by increasing the WC assistance. The critical point here is in
contrast to that of term lending which comes
with fixed tenor, the WC facilities do not practically have fixed tenor
or to say have only virtual tenor (i.e. one year valid line as per sanction
terms). Lenders while assessing the Term Lending requirement clearly spell out
the repayment period and thereby the drawing the exit route from the transaction
i.e at the time of assessment only the lender knows when he will be able to come
out/exit. But what about the WC assistance? Do the lenders draw the plan of
exit from the relationship? On paper, Yes (since the line is stipulated as valid
only for one year) but practically, No. This is because as long as the
relationship is good, the lender keeps on being with the company (waiting for
the bad time to come to deteriorate the asset quality !!). So, do I mean to say that even if the account
is good, lender should look for exit? I would suggest to consider the following
points before developing views on this:
1. All industries see a cycle of performance from
good times to bad and vice versa. When it would be bad time and lender would be
requiring the borrower to give exit, won’t the borrower see the lender only as
friend of good time? Therefore, it is the good time only when the lenders have
to have a plan of exit (and it will be very easy for the borrower also to
replace the lender). All private equity investment deals have this agreed plan
between the parties. So, this is something which is acceptable to the financing
world provided it is clearly spelled out as part of relationship terms at the
beginning only.
2. By continuing with a relationship, over the years
borrower leverages the relationship and succeeds in reducing lenders commissions/margins,
and which is generally difficult for the lender to resist. Do you have any
client who increases your commission after 4-5 years of fruitful relationship??
3. With the limited resources, lender’s activities
would be concentrated only to limited no. of borrowers and lender would be
missing the other new clients which may give better income.
4. By focusing his financial resources on existing
borrowers lender misses the opportunity of diversifying risks.
5. Practically, if the lender try to exit at time
bad time (i.e. borrower not performing well or other unfavourable reasons), it would
not be possible due to stressed financial position of the borrower, and lender
would most likely end up with a restructured account.
6. Borrower may not mind to know at the start only
when the lender would like to exit or his exit plans. Such agreement in advance
will make borrower ready to start the replacement exercise in advance.
7. If exit plans are known in advance, both the
parties may not like to completely detach. Borrower may have other
opportunities by way of relationship in some other group companies.
8. In a way,
the exit plan of WC lender would provide a right direction to the financing
plans of the borrower as the borrower would timely take action and right
approach for funding. Ascertaining the discontinuation of short term WC funds
at a point of time, the borrower would be discouraged to resort to strategy of
using the short term funds for long term funds.
9. Ways can be devised to recreate the relationship
after a certain time, for example, the lender’s credit policy may allow to
re-enter the WC relationship after a cooling period of certain years say 2-3
years.
10. What happens to your existing cross sale
business penetration which you garnered over the years of relationship and
which will collapse if you exit from the relationship? Suppose you have got all
the cross sale business but after a certain point when the borrower requires
you to increase the exposure, but your basic instinct/credit policy/assessment
does not allow/suggests you to go for such enhancement, do you think that
borrower will stick to the loyalty and continue to pass on that cross sale
business to you?? He can’t because he will need to offer the same to other
lenders in order to get them agree to increase their exposure. So, in the business
of lending, advantage of cross sale cannot become the deciding factor to
continue the relationship or not and therefore the loss of cross sale business
should not be deterrent to exit strategy specially when it is planned at the
time of entry only.
But other questions which are posed are, how or on
what point one can decide to exit. What should be the parameters to decide exit
point? Well, since we are looking from point of view of clarity about the exit at
the time of entering into the relationship only, then the way could be a simple
plan based on pre-decided period of relationship and overall profitability of
account to be provided by the borrower over the planned period of relationship.
The beginning of the relationship may enumerate the parameters based on which the
exposure would be increased and when it would begin to recede, giving the plan
a bell curve shape of lending during the relationship period. I think the best
way to think would be to think like private equity investors who first thinks
about the exit and overall return from the investment before making the
investment !!
