Refinancing: Steer your business through troubled waters

Companies tend to turn to their existing bank for help but previous recessions suggest that many will be reluctant to extend credit lines. It will be equally difficult to secure new money from new lenders. Recent data confirms low lending levels; risk-averse banks are managing down exposures, not looking to lend new money. This is obvious in the syndicated loan markets, where syndicates are shrinking with each refinancing as banks look to reduce lending and repair their balance sheets. So what other options may be available? 

Capital Markets

AIM has helped numerous medium-sized businesses raise finance this year. However, closer analysis shows that over 80 per cent of the £808m raised to July 2009 went to mining, minerals and real estate companies. Of the other new listings, only one was a non-financial company, indicating poor interest in other industrial and service sectors.Government Schemes and Factoring

The government is restricted in the help it can provide, so schemes target employment creation and R&D and innovation financing rather than operational support. However, the Enterprise Finance Guarantee (EFG) offers one potential option. The Department for Business, Enterprise and Regulatory Reform (BERR) may guarantee a loan provided to a qualifying SME by an EFG lending partner, if there is insufficient asset backing to allow conventional bank approval.

Factoring, although expensive, may be a company’s only route to additional funding. The company gives its receivables as security to the factoring arm of a bank, which then chases the debtors for payment. In return, the company receives a loan of up to 80 per cent of the value of its receivables. Banks often offer factoring as a "backdoor" way of improving their position as a creditor when a company is distressed, so business owners should be cautious. The other problem is returning to normal terms when the economy recovers: banks loathe giving up security once they have it. That said, some business owners find factoring preferable to securing finance with personal guarantees.

So new funding may be available through factoring, government assistance or the capital markets – if the business qualifies.  Otherwise, business owners must look to their bank.

Maximising the banking relationship

 While lending activity has declined, it has not ceased. Bank managers have some discretion, even though credit scoring is used heavily in setting the basic lending framework. A business is more likely to secure credit if it has cultivated a good relationship with its bank manager through good management information, frequent dialogue and no surprises. Comprehensive, timely management information that builds the business’ case will set it apart from other borrowers. Regular communication is also important. A company may win a huge business contract and reach its overdraft limit by restocking to fulfil the order. If the bank manager has not been informed of the reason in advance, this may look like a sign of distress rather than a cause for celebration. Moreover, this "surprise" may cast doubts on the professionalism, reliability and organisation of the company’s management team. Context and timeliness is all.

At this critical stage of the economic cycle, it is even more important that the bank manager’s expectations are managed, so they feel like an “insider”. Outside the black and white of the profit and loss account, the best evidence of the company’s credit-worthiness is its ability to demonstrate that it is in control of its finances and business activity. Hence, the quality of the company’s dialogue with its bank manager may be the difference between survival and failure.

Links to further information:

More information about AIM is available at http://www.londonstockexchange.com.

http://www.berr.gov.uk is a useful starting point for more information on government assistance

Mark Woolhouse is a training consultant at CTG, a division of the ILX Group plc.Related articles Entrepreneurs turn their backs on AIM Tech entrepreneur: "The banks won’t lend you an umbrella when it rains" What VCs really think

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