Even the strongest businesses are finding accessing credit through a bank difficult in the current environment. Below are some ideas that may assist businesses to continue the hunt when their bank won't come to the party;
1) Employ an expert
When applying for equity finance businesses will invariably incur cost seeking the input of experts to ensure that the likelihood of raising funds is maximised. However businesses seldom seek expert assistance when applying for debt finance. Having an experienced banker assist you in putting together your story in a way that is extremely compelling for a bank is valuable, especially in this environment, and will maximise your chance of success. Often these experts will not actually cost you anything as they will be accredited brokers with the recipient banks and will be paid commissions by the banks for your business.
2) Government Grants
There are over 300 grants available to Australian Businesses from the government to encourage businesses growth and prosperity. Speak to an expert (eg Grant Ready) about whether your business is eligible for any of these. These experts might take a percentage of the grant for their assistance, but they will maximise your chance of obtaining one, should there be one that fits you and your business.
3) Debtor/Inventory Finance
Historically when a business needs finance, it goes to the bank and asks for a loan, and this loan is secured by business assets, but backed up by personal security. Without bricks and mortar banks have a limited appetite to lend against business assets (generally deeming this to be an unsecured proposition). However most lenders these days have a debtor finance product where they will lend a business up to 80% of the value of invoices provided to customers, secured for the most part by these invoices. There are intricacies re concentration of debtors and collection performance, but on the whole these are very effective facilities for businesses that are growing fast and enduring large working capital strains due to trading terms with customers. A broker can assist you to determine whether this is a reasonable proposition with a financier.
4) Family and Friends
Whilst some might not be positioned to do so, do not undervalue the prospect of seeking assistance from family and friends. This can be a cheap form of finance, though the emotional risk of business failure and the consequences on these relationships needs to be dealt with proactively. Formally documenting such relationships is important, to minimise the risk of misunderstanding and some of the upside to receiving the funds should be considered to avoid jealousies and frustrations that can be natural in such circumstances.
5) Business Angels and Venture Capital
Depending on how important it is to obtain funds, you might wish to consider sharing some of the ownership of the company. These relationships can vary in terms of control of the business required by the investor, and the amount of additional value add that the provider can offer, including broadening your network for sales opportunity, or helping set up alliances that might reduce operating costs. These relationships can be incredibly powerful, and there is still a significant amount of personal wealth available to be tapped in to. Most business advisors would know of avenues to obtain such funding.
6) Personal Funding
Depending on what and how much the business needs, it might be possible to cover the funding gap in the short term using personal financing options. Equity in your home loan can be accessed either by home loans or in some instances reverse mortgages. Credit Cards are also relatively freely available, though an extremely expensive form of finance. The important thing to realise as a business owner offering personal assets is that if the business fails, you will lose these assets. Speaking to your accountant and lawyer can help minimise this risk but unless you are very much in control of the business and its destiny I would be reluctant to volunteer personal assest unless the reward significantly exceeds the risk of the proposition.
It is important to note that banks are still lending money, and whilst down 15percent on preceeding periods, new business loans below $2m still totaled $19.3B at the end of June. Bankers still have sales targets and bonuses that rely on profitable business being written. But the credit departments have a close eye on quality. If obtaining finance is a struggle, talking to an experienced banker is likely to be a good first port of call.
Monday, September 22, 2008
Friday, September 19, 2008
What a week in banking, but has anything changed
Talking last night with insolvency experts, it would seem that the world from their perspective is a dark and dangerous place now. By far the biggest single reason for business failure in their opinion is the global credit crunch/crisis.
There is no doubt that today, when presented with a lending opportunity bankers are thinking much more than twice. They are also becoming less forgiving with businesses where the bank suspects that the future is bleak. In many instances these banks are forcing Investigative Accountant reports upon the clients, as is their right, simply to have the Accountants tell the bank what they already know - this is not a good customer. The same amount that the client pays for the Investigative Accountant could be paid to pay the same Accountant to help guide the business out of the pickle.
Banks however have been more nervous for over 6 months now, and in fact, we are finding that in fact at Business and Corporate banking level, banks have calmed down somewhat. They are still open for new business, and staff are still being remunerated to find new business. However credit departments (who control the cheque book) have gone back to basics and are, for the most part applying sensible and prudent credit process. The deals that they have stopped doing, are the deals that they should probably an hot done in the first place!
However one thing we are noticing is that it pays to have a banker help you prepare your submission. Addressing all the negative aspects of your business shows that you are in control and that you know there are negatives. A customer that does this (assuming the underlying foundations of the business are sound) is attractive because it shows that they know their business, they are strategic in their ability to identify and deal with weakness, and they are honest and up front - in other words less likely to surprise the bank.
There is no doubt that today, when presented with a lending opportunity bankers are thinking much more than twice. They are also becoming less forgiving with businesses where the bank suspects that the future is bleak. In many instances these banks are forcing Investigative Accountant reports upon the clients, as is their right, simply to have the Accountants tell the bank what they already know - this is not a good customer. The same amount that the client pays for the Investigative Accountant could be paid to pay the same Accountant to help guide the business out of the pickle.
Banks however have been more nervous for over 6 months now, and in fact, we are finding that in fact at Business and Corporate banking level, banks have calmed down somewhat. They are still open for new business, and staff are still being remunerated to find new business. However credit departments (who control the cheque book) have gone back to basics and are, for the most part applying sensible and prudent credit process. The deals that they have stopped doing, are the deals that they should probably an hot done in the first place!
However one thing we are noticing is that it pays to have a banker help you prepare your submission. Addressing all the negative aspects of your business shows that you are in control and that you know there are negatives. A customer that does this (assuming the underlying foundations of the business are sound) is attractive because it shows that they know their business, they are strategic in their ability to identify and deal with weakness, and they are honest and up front - in other words less likely to surprise the bank.
Thursday, September 11, 2008
Wednesday, September 3, 2008
5 things not to do when applying for business finance
Rather than cover some of the "to dos" in banking I thought I'd share a few of the "Not to dos", as there are some not so obvious pitfalls that many businesses fall foul of when applying for credit.
1) Don't let the bank guess anything
Too often business either opts not to tell the whole story or takes for granted that the bank will know parts of the story. But beware, if left to their own devises, banks will always err on the side of conservatism, and will assume the worst. If you have related entities in your balance sheet, a bank will assume they are there to actively hide funds from creditors. If you have growing inventory, the bank will assume that the market has dried up and your stock is worthless. If you have disproportionate growth in Cost of Goods Sold, the bank will assume your trade creditors don't like you and are increasing trade terms. The lesson: Always proactively deal with the negatives in your application and if you don't know what they are, ask an expert.
2) Don't falsify information
Pretty obvious, but regularly ignored. Banks have long memories (there's always someone in the credit department who remembers something that happened years ago), and access to information. Invariably they will find out either before, during or after an application is approved and they will never react favourably once false information is outed (perhaps this is the obvious bit).
3) Don't leave it to the bank to work out your money flows
If you have intra group funds flowing, you need to give comfort to the lender that other group members will not bleed the borrowing entity dry of cash and solvency. Proactively dealing with this involves disclosing who the entities are, what they do, and where possible, what their financial circumstance is. Proactively dealing with this will reduce time and complication of the lending process.
4) Don't present a forecast P & L without a forecast Balance Sheet
Bank analysis tools do not operate properly without a balance sheet. Also, without a balance sheet you are only telling part of the story and you are not demonstrating that you are on top of the financial mechanics of your business. Accountants should be able to assist with construction of forecasts that incorporate these if need be.
5) Don't leave it to the bank to identify their ideal security structure
Banks are not Equity providers, and expect significantly less risk in their "investment". In return for this reduced risk they obviously expect a lesser return. The more risk the bank can mitigate through security (ie directors guarantees, homes, business property, related party assets etc), the greater the risk:return ratio and, at a portfolio level, the more money they make for their shareholders. So, given half a chance they will take all they can, and more often than not they do. However understanding this premise, it is possible to reduce the security provided, as long as you can present an otherwise reduced risk proposition. This may include demonstrating strong servicing capacity. It may require providing some property but not all. The key is to present the security structure to the bank, thereby setting the expectation levels and providing you a point from which to negotiate.
If you would like to talk to an independent commercial finance expert, why not contact Pearl Financial Services? Our Commercial Finance Advisors can assist you in becoming bank ready, optimising the chance of success when applying for commercial finance.
1) Don't let the bank guess anything
Too often business either opts not to tell the whole story or takes for granted that the bank will know parts of the story. But beware, if left to their own devises, banks will always err on the side of conservatism, and will assume the worst. If you have related entities in your balance sheet, a bank will assume they are there to actively hide funds from creditors. If you have growing inventory, the bank will assume that the market has dried up and your stock is worthless. If you have disproportionate growth in Cost of Goods Sold, the bank will assume your trade creditors don't like you and are increasing trade terms. The lesson: Always proactively deal with the negatives in your application and if you don't know what they are, ask an expert.
2) Don't falsify information
Pretty obvious, but regularly ignored. Banks have long memories (there's always someone in the credit department who remembers something that happened years ago), and access to information. Invariably they will find out either before, during or after an application is approved and they will never react favourably once false information is outed (perhaps this is the obvious bit).
3) Don't leave it to the bank to work out your money flows
If you have intra group funds flowing, you need to give comfort to the lender that other group members will not bleed the borrowing entity dry of cash and solvency. Proactively dealing with this involves disclosing who the entities are, what they do, and where possible, what their financial circumstance is. Proactively dealing with this will reduce time and complication of the lending process.
4) Don't present a forecast P & L without a forecast Balance Sheet
Bank analysis tools do not operate properly without a balance sheet. Also, without a balance sheet you are only telling part of the story and you are not demonstrating that you are on top of the financial mechanics of your business. Accountants should be able to assist with construction of forecasts that incorporate these if need be.
5) Don't leave it to the bank to identify their ideal security structure
Banks are not Equity providers, and expect significantly less risk in their "investment". In return for this reduced risk they obviously expect a lesser return. The more risk the bank can mitigate through security (ie directors guarantees, homes, business property, related party assets etc), the greater the risk:return ratio and, at a portfolio level, the more money they make for their shareholders. So, given half a chance they will take all they can, and more often than not they do. However understanding this premise, it is possible to reduce the security provided, as long as you can present an otherwise reduced risk proposition. This may include demonstrating strong servicing capacity. It may require providing some property but not all. The key is to present the security structure to the bank, thereby setting the expectation levels and providing you a point from which to negotiate.
If you would like to talk to an independent commercial finance expert, why not contact Pearl Financial Services? Our Commercial Finance Advisors can assist you in becoming bank ready, optimising the chance of success when applying for commercial finance.
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