Do you have enough Equity in your business?

Banks in Australia have never been particularly excited about lending against cash flow. However in recent years, when bank funding was luxurious and sales departments ran the banks, if a business could demonstrate sales strength and profitability, banks would generally open their arms.

But all good things have to come to an end. With credit now well and truely back in the driving seat, cash flow lending is a big ask. The banks will support strong businesses with secure cash flows, however without a obvious second way out in the way of security the door is essentially shut.

Second way out can come in many forms:- inventory, debtors, property, the personal wealth of directors to name a few. But if the business does not have at least equal amounts of equity on the balance sheet to the amount of debt required from a bank, then the banks are turning their noses up.

There is a school of though that believes that this ratio will only reduce in the near future - ie banks will only lend to say 50% of the equity held by shareholders. For businesses where shareholders have enjoyed the ability to take hefty dividends this is going to cause problems. Especially if those dividends are relied upon to service personal facilities.

If your business is in this position, I would be happy to spend an obligation free hour with you to help you work through how you protect yourself from this potential issue.