Maximise Your Business Finance Options

24-Oct-2016 Maximise Your Business Finance Options

Steven O’Neill of Pitcher Partners examines the changing domain of finance, and provides valuable tips on maximising your business’s potential to finance new growth opportunities.

As a new business or one looking towards growth, you’ll inevitably experience a need for additional working capital to fund the establishment or expansion of your business.

The majority of businesses will be approaching either their existing bank financiers or a new bank for assistance. But despite the low interest rates being offered, since the GFC the banking market has remained extremely conservative in its lending practices. Information requirements for approval of finance applications are more stringent than ever before.

As a new business or one looking towards growth, you’ll inevitably experience a need for additional working capital to fund the establishment or expansion of your business

The majority of businesses will be approaching either their existing bank financiers or a new bank for assistance.  But despite the low interest rates being offered, since the GFC the banking market has remained extremely conservative in its lending practices. Information requirements for approval of finance applications are more stringent than ever before.

Getting the picture straight

The importance of presenting professional and accurate information to potential financiers cannot be underestimated. Financiers want to be confident in the quality of your reporting and in the reliability of financial and other information, especially when they’re looking to fund small to medium sized businesses. In the current environment of ‘instant information’, bankers do not believe that there is an excuse for providing aged, inaccurate or unsophisticated financial data.

Of course, preparing accurate numbers to support your proposal is only half the battle. Outlining your experience and matching your strategy and business requirements to the financial data presented will allow your financier a full picture of your business vision and its funding requirements, allowing you to demonstrate why an investment in your business will be a success. 

Typically, such a plan would outline:

  • Your business’s background
  • Key director and staff profiles, including details of relevant experience
  • Market analysis, including competitors
  • Marketing strategies (both short term and longer term)
  • Operational plan
  • Management information systems and reporting
  • Financial plan, including forecast financial model.
  • In preparing such a plan, it’s important that business owners take a step back from their companies and be objective about how they are performing. It is often helpful in these circumstances to enlist help from trusted advisors so that issues can be dealt with objectively, honestly and thoroughly. Whether starting from scratch or looking to extend your operations, the banks will be looking for robust information to support their lending decisions. Providing all of this information upfront and accurately provides confidence in the management systems and processes you have in place to support your operation. Having your financial information underwritten and prepared by a reputable third party, such as a reputable accountant advisor, will significantly increase the likelihood that your credit application is successful.

    In some circumstances, you may even be able to ‘shop around’ your data to more than one bank and play one financier off against another to obtain more favourable loan pricing or lower covenant thresholds, and avoid the requirement to pledge additional security such as your family home or business premises.

    Information you should include Strategic plan

    A written business plan demonstrates clearly that the proprietors of the business have thought about their operation, where it sits in relation to the industry and competition, and how they are going to maximise opportunities in the marketplace or overcome historical problems.  The market analysis and marketing strategy should address the areas of competition, pricing, sales strategies and so on. The financial plan should contain operating budgets and cashflow forecasts that support the business’s financing requirements. For example, you will need to provide evidence that if the bank offers your business increased facilities, you will be able to service these going forward. This will not only include interest coverage, but also principal reductions as required by the financier. These requirements are more evident in today’s market. Whereas previously a business would have provided just a profit and loss account budget loosely based on the previous year’s financial statements, financiers now want to know a great deal more about the business and the industry in which it operates.

    Financiers want to assess whether the business can support the debt, whether they can free up cashflow to service business and seasonal fluctuations, and in the event of large volume asset finance, what future balance sheets are likely to look like following aggressive capital expenditure to support expansion. This plan should form a roadmap to future success, setting milestone goals and achievements along the way.

    Financial information

    Preparation of a budget model that links the profit and loss, balance sheet and cashflow together as a ‘three-way financial model’ assists the financier in tying together funding requirements with potential future growth in the business. It allows for the assessment of cashflow requirements, while being able to see that the business can support the requirements. Being able to reliably and accurately communicate your assumptions with respect to the key drivers of your business again provides confidence in the numbers presented, as well as showing sufficient consideration of items such as local square metre rates and occupancy take up.

    Funding requirements

    Clearly articulating the funding requirements, and how they are supported by equity or business valuations, shows a level of understanding of the funding process and clearly sets out your requirements to the bank Including a funding timeframe will also assist in clearly setting parameters around finance requirements, with potential amortisation of debt into the future supported by the financialmodel above.  

    Having strong working relationships with your financiers forms a large part of the funding process, but being able to present clear, accurate and timely information is critical in demonstrating your commitment to the relationship. Obviously, the old adage of ‘garbage in, garbage out’ must be considered. Are you using opening balances based on finalised or audited year end accounts? Are you accurately reflecting debtor collection cycles? Have you considered forecast increases in fixed and variable overheads? Does your cashflow forecast reflect seasonality? Have you performed ‘what if’ analyses on your model to ensure you can still service your new loan repayments? Modern bankers are far more tech savvy than their predecessors, and their forecast and business plan expectations are significantly higher.

    Once funding is obtained

    Once funding has been obtained, this will not be the end of your relationship with the bank. There will be reporting requirements or covenants within the finance agreements which will likely require you to link your actual results back to the original budgets provided, EBITDA, interest cover, or loan to value ratios (LVRs) depending on your particular agreement with the bank.  Preparation of timely information is paramount to providing this type of information to the bank within the timeframes set out in the funding agreement. Typically, there will be a quarterly reporting requirement with short lead times (15 to 45 days). You need to have access to live data to ensure your covenants are in line and adequately covered.

    There may also be a requirement to ‘recut’ your budget at some stage during the year based on either increases or decreases in occupancy. If this is the case, the new model will need to be supported to justify the revised position to the bank, and any resultant effects on your ability to meet bank covenants.  The preparation of three-way financial models provides a robust basis for you as an owner to assess your actual performance.  Even without bank requirements in place, it is a best practice approach to regularly monitor your business and measure your achievements against your expectations.  This, coupled with strong internal controls, corporate governance, up to the minute and accurate reporting, will set your business up for the best chance at success.


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