How you approach your bank or financier for more money makes a real difference to whether you succeed in getting them to take more risks.
By Mary McKinven
The new mantra for New Zealand businesses is to have less debt. The sharp lesson from the global financial crisis for New Zealand businesses is that funds are hard to come by these days. According to the Reserve Bank, credit growth across the business sector decreased 7.6% at September 2010 compared to September 2009. The underlying message is that credit is still tight and banks will carry out tough risk assessments before extending new credit lines. So when it comes time to refinance either to reduce debt or extend cash flow needs, what are the options?
Senior business adviser at Icon Business Solutions, Jon Brewerton, says:
“Banks are difficult for business lending. They are risk-averse and really only lend if you don’t need it.”
He cites the example of an exporter of seasonal goods he worked with that had five staff and revenue of about $14 million. At its required annual refinancing one year, the bank refused to renew with two weeks notice at Christmas time. The firm had missed a couple of covenant measures. “This caused a lot of problems. It seemed diabolical to me.” Brewerton says. The exporter was a seasonal buyer and supplier, with goods on the water for 60 days and a cash cycle of more than 120 days. From the start of the year finance was used to fund purchases till late in the year, creating an overdraft of about $5 million. Then returns would come in slowly from debtors and the company would make a profit by the end of the year.
The bank was also concerned the business was forecasting finance needs based on $18 million of revenue, mostly debtor-funded.
So Brewerton helped the company look for additional investors and ways to mitigate risk from the bank’s perspective. Eventually the exporter settled with another bank.“I don’t know why, because both banks had the same information given to them. Maybe the new bank had different forecasting information.”
Brewerton recommends businesses avoid refinancing problems by understanding their requirements and choosing the best funding terms in the first place. They should ask themselves, for example, whether they need short term (under two years) or long term (3-20 years) financing. Lenders commonly review funding each year, therefore good reporting systems and forecasts are important. “Have a documented finance plan on hand to send to another bank if you need to; it’s a risk-management tool that needs to be kept up to date.”
Chris Mardon, managing director of Energy Mad, which makes eco light bulbs, says banks are risk-averse and prone to foreclose on loans when they want to reduce exposure on certain sectors. “Bigger companies than us have similar stories to tell: ‘one day the bank rang and said we see you are going well — we want our money back now’.”
Mardon recommends people needing to refinance look to private investors or old-fashioned equity. His company is also cautious about who it sells to.
“There’s plenty of money out there but they [investors] are risk-averse too.
“Debt is bad and hard to get right now. Grow organically, generate cash from your own business and collect [payments] as soon as possible. Collect cash as soon as you can and pay as slow as possible – this seems to be good business practice that we follow now.”
A new arrival on the specialised finance scene is Funding Partners, based in Auckland. The company offers a combination of invoice finance, export finance and structured financial products.
Director of business development Graeme Hill is a former banker and finance company general manager. He says Funding Partners differs from most finance sector players in not seeking funds from the public. “We have developed a business around the idea of bringing global best practice to the New Zealand market. This includes wholesale funding lines, products and systems that result in an offering for businesses that was previously unattainable. “We can be competitive with traditional funders yet offer product capability and flexibility well beyond bank-type guidelines.”
Each product incurs application and administration fees and interest on the outstanding loan balance. Interest is in the 8-15% range, depending on risk, between the rates banks and finance companies charge for similar products.
Funding Partners requires relatively standard information from prospective clients, such as their past three years’ financials, current trading results, projections and business plans.
“It is also important we understand the overall strategic direction of a client to be able to provide a funding solution that incorporates likely future requirements,” Hill says.
Once Funding Partners has all the information it needs, it can process and approve a standard funding application within five working days. Loan terms and structure vary and are reviewed each year, the same as with banks.
Funding Partners can lend anything from $500,000 to $100 million, and offers support for New Zealand exporters in over 227 cities, backed by strong and credible global connections, Hill says.
ANZ New Zealand’s general manager, specialist businesses, Ross Verry, says the bank has seen more inquiry for asset finance over the past six to nine months, with plant or equipment used as loan security. But the ANZ is keen for clients to place emphasis on future planning and less focus on history to lift their game. “The two main things [we like to see] are planning – financial elements as well as comments on the marketplace and opportunities – and engaging independent advice; maybe a mentor, a professional adviser or making the leap towards governance, with outsiders to bring new skills, ideas and challenges.” [END]