The Dead Cat Bounce
Not the nicest of analogies used in finance but one that accounts for a lot of the misunderstanding between businesses and lenders.
The misunderstanding I refer to is the one where the borrowing business shows the lender some new accounts which show an upturn in performance, usually the business has held off applying for finance until their accounts show an upturn after a period of breakeven or small losses.
The expectation is that the lender will look at the improving trend and be happier to lend. Too often the borrower is disappointed to find that the lender does not share their enthusiasm and is somewhat less than excited by the sudden improvement in the applicant’s accounts.
You see, the lender sees things differently, they just don’t always communicate it that well.
It’s called the dead cat bounce. A rather unsavoury analogy that says even a dead cat bounces.
Why The Problem?
As is so often the case, the business owner is optimistic and the lender a little more pessimistic, it is a glass half full, glass half empty type of situation.
The problem comes from the fact that many businesses will show an upturn in performance prior to failing. This is often due to an enhanced effort to obtain sales, a drive to reduce costs and delaying other outgoings. They could also have put back payment to creditors or defaulted on payments. The net effect being that performance appears to have improved when in reality the business is on the verge of falling over.
I am not saying this always happens because it doesn’t, but you need to remember that the lender’s (or underwriter’s) glass is always half empty and as such they fear the dead cat bounce.
How The Applicant Solves This
It is all about showing why your business does not fall into this bracket. The best way to do this can be provide a lender with projected figures then go back at a later date with actual results, this shows that the growth and upturn was planned as part of your business and due to sound reasons.
The other option is to arrange finance in advance. Contrary to popular belief you do not need to be showing profits to borrow, it helps but is not necessarily essential. Ensuring your business has adequate cash reserves means that there is less rush or absolute need to borrow at any given time.
The bottom line is to plan ahead, it always helps.
The dead cat bounce. Not the nicest of lending analogies but one that is in the text books, worth knowing as it may save you some hassle in the future.
By Dave Farmer