Business owners should keep their financing options open rather than rushing into remortgaging their homes.
BY VAL LEVESON
In these recessionary times, some businesses are finding they need extra funding to keep afloat, driving some to remortgage their homes. This is something the experts say is not a great idea, especially not when there are other options.
Westpac head of international business Barry Squires says New Zealand banks are open for business. “We have money to lend for good deals.” He says remortgaging the house is not a good idea – but the bank may expect you to have your house as security for a deal. “Our perspective is for businesses not to remortgage their houses, although there are a number of small enterprises that are doing it that way. The bank does take a mortgage as security, not to finance the business. When we lend money, we like to see a personal guarantee from the directors it’s too easy for business owners to walk away if things go badly, otherwise. We don’t actually want to realise the home.” Squires advises business owners to talk to the bank early. “That way you can get good advice, and the bank can know what’s really happening.”
EYE ON ACCOUNTS
He advises that company directors keep strict management of all accounts, and be aware of forecasts. “We ask for monthly accounts – by doing that we keep a finger on the pulse of the business. Company directors should not be taken by surprise when they get into trouble. They need to look at their debtors and follow up rigorously.”
Squires says we have a robust banking system that can lead. He acknowledges that exporter customers are having problems. “They are being affected by what’s happening in other countries – some importers can’t get funding to buy our exporters’ goods. they go back to the supplier and ask for longer financing terms, which can be difficult for exporters.”
He says the bank needs customers to have firm orders when applying for funding. “The past 18 months have been tough for a lot of customers going through the downturn. If orders are going down, the directors can’t drive the company to grow. The timber industry, in particular, has had a hard time – there have been no orders for construction-grade timber to the United States. “It’s important to look down the supply chain – you may not want to close a factory or take away jobs – but that may be the best way to keep things going. some of these things are not the end of the world – things do pick up. The thinking is that by the December quarter New Zealand will be out of the recession. Things have already stopped getting worse.”
FIVE QUESTIONS
Squires says that in these times businesses need to be manufacturing for orders, not stock. “Ask five questions: who are you buying from, when do you need to pay, how long will you hold inventory, who will you sell to and how will you be paid.”
The key is to unlock the working capital cycle. It is possible to get funding for pre- and post-shipment orders. Post-shipment orders are easier – the bank researches the buyer’s credit rating and looks at the receivables. “If it’s a company like Sainsburys in Britain, the decision is easy – there’s not much credit risk.” He says the risk would be that the quality of goods are not up to scratch and this is where it’s a good idea for a company to have insurance, as if there’s a commercial dispute it’s likely the bank will pass on the receivables back to you.
There is more risk with pre-shipment funding as it’s hard for the bank to take security over stock. “If the stock’s in New Zealand it’s easier – but it’s harder if it’s offshore.” Things to consider on the pre-shipment side are procurement, and trade finance factoring. On the post-shipment side, letters of credit and open account receivable purchases are to be considered.
FACTORING
Lock Finance has started an export factoring product. “up until now we have mainly dealt with domestic factoring,” says Simon Thompson, general manager operations.
Factoring is allowing funding against accounts receivable. “We look at the debtors, and often can put forward 80-90% of what they owe so you can use it now.” Thompson says: “Most factoring is done on a recourse basis – if the debtor doesn’t pay, the client must buy the debt back.” As far as export factoring is concerned, Lock Finance networks with companies that can collect debts in other countries.
He suggests that exporters should not sell overseas without letters of credit. he says: “We underwrite through International Factors group – if we have invoices and sales orders that have been accepted by other parties, we can supply funding. We can do foreign exchange services and forward money to the exporter in whatever currency they will be paid. What we’re offering is a straight forward product.”