Bankers and businesses at logger heads!

At the heart of this is a gulf between business owners and bank managers as to the role of bank debt. Bank managers consider debt to be an appropriate way to finance low risk changes to business operations through an increase in working capital. Many business owners, however, have little access to sources of finance better suited to higher risks (e.g. equity capital) and see banks as the lender of last resort, available to prop up the company through periods of temporary difficulty and, inevitably, periods of high risk.

Business owners need to get good advice on the best way to approach their financing needs and to also understand how to best package and present themselves to banks, buyers or financiers.

The pot of money is both smaller and harder to get

The extent to which bank lending is now restricted is illustrated by a commercial manager of one major bank whose rate of lending has dropped by a third from £6m a month last year to currently around £4m a month. Others are reported to have fallen by up to 60%.

Across the board, however, the interest rates at which banks are prepared to lend have all increased, often to a percentage plus LIBOR rather than base. Furthermore, a far greater level of security is now required by banks which means that for smaller less established businesses, owners are having to put their houses on the line as well as agreeing to onerous covenants.

What does this mean?

In contrast to a year ago, banks are no longer chasing companies with offers of attractive loans. Whatever anyone claims, there is a smaller pool of money for which companies are now competing hard.

A sketchy outline of a business plan is insufficient to raise money. In contrast, a well thought through business plan with detailed cash flow analysis across a range of scenarios will not only give businesses the best chance of negotiating a loan at acceptable terms, but will also help companies to prioritise and focus on the risks / opportunities that are most important.

In this regard, many companies find it beneficial to use an experienced outside advisor to support the development of the plan as it not only helps the management team to see the wood from trees, but also helps to ensure that they present a well worked solution to their bank rather than a series of problems. But in either event, it is vital to keep the bank manager informed as “the bank generally can’t do much to help when we’re the last to find out there’s a problem.”

What we find

In the current recession, we are starting see a pattern where companies are falling into one of a small number of camps:

·         Defensive – Companies that are digging-in, taking out cost and looking to sit-it-out by fighting off the danger points as they arise with tactical responses.

·         Dangerous – Companies that have unstable business models and that are responding to change based on rapid gut decisions - but without clear direction or planning. These are the high risk companies and typically already starting to run out of oxygen.

·         Deliberate – Companies that are placing controlled bets in areas where they have developed a clear knowledge advantage. These are the companies that are likely to leapfrog competitors and emerge far stronger from the recession.    

Dependent on which camp your own company is in, you are likely to have to approach your bank in different ways:

·         Companies in the defensive camp are likely to be relatively risk averse but probably also suffering from very tight cash flow, having seen sales shrink or costs rise. Banks will be looking to understand the extent to which you can withstand further business shocks, and developing a detailed forward cash flow analysis based on expected, low and even lower assumptions will demonstrate the level of interest cover the business will provide.  

·         Those companies we broadly classify as dangerous, typically find it hard to raise debt finance without rock solid guarantees as banks simply perceive them to be too high risk. Even excellently structured business plans will fail to impress if they are not based on solid foundations. In this context, business owners need to take tough decisions early and to seek finance more appropriate to higher risk.

·         Companies that are deliberate and proactive in their approach find it relatively (!) easy to raise debt finance as they have planned carefully into the future, look to take measured risks and generally have a good track record. Banks like these companies, but only where they can see and understand what the managers see. This is about careful and effective packaging.  

No plan works, but you can’t work without one!

The age old military adage is just as true in business. Whichever camp your company is in, use the opportunity to create a really sound business plan as it will help you to make tough decisions early. Never has it been so important to ensure that experience triumphs over hope, as in this precipitous and highly volatile market.  

Andrew Blayney is a partner in Fleming Verity LLP, which specialises in helping owner-managers to raise finance or sell companies. www.flemingverity.com