As we enter 2013, many SMEs will be squaring up to the challenge of refinancing in a difficult financial climate. Though this is without doubt a nail-biting experience for most – everyone has heard refinancing horror stories – there are important steps that responsible businesses should take to get their business into shape and maximise their chances of success.At present, businesses are at greater risk of underperformance. Lenders who believe in the management team and the business will be prepared to back a turnaround plan. However, lender fatigue can set in if the relationship breaks down and either party loses confidence in achieving a positive outcome. It is very rare that lender relationships break down due to pricing issues. Businesses should always look to maintain a good, long-term relationship with their funder. Once a strong relationship has been established, it is easier to have a meaningful conversation about pricing – as lenders would rather agree to some concessions than lose a valued customer. If your business is in this situation, the management team needs to seriously consider the available refinancing options. Just because the spark has gone out with your current funders does not mean that there won’t be another lender out there, excited about making an offer of finance. Before approaching the market, a business should reflect honestly on why the lender relationship has broken down. Ask yourself honestly whether any of the following could describe your business:
- Late filing of accounts;
- Late presentation of management accounts;
- Lack of meaningful management accounts and projections;
- Poor stock and sales ledger controls – which will have a negative effect on cash flow and lenders security;
- An undercapitalised business operating without any headroom in the lending facility;
- An underperforming business with trading in decline;
- Lifestyle business which can no longer afford to finance lifestyles; or
- Lack of communication
1. Establish a quality refinancing information packThis should include audited accounts, management accounts and projections to be made available to potential new financiers. If a business has been underperforming/experiencing cash flow difficulties, it is important to explain what has gone wrong and confidently present a detailed turnaround plan incorporated in the projections to improve profitability and cash flow.
2. Ensure that the company’s asset base and future trading prospects offer a realistic chance of securing the working capital requirement the business needsOften the expectations of management teams are dashed because they go into a refinancing exercise without understanding, from their advisors, what lending facility is achievable. If there is going to be a working capital shortfall, it is best to understand the issues in advance so that loans, further equity and personal guarantees are properly considered by management and stakeholders.
3. Work with advisors who have an in depth understanding of the marketThey can share information on which lenders are likely to be most interested in a refinancing opportunity. If the business is in a turnaround situation, it is important that management have a strong understanding of the attitude of the new lenders to giving the necessary support. Lack of robust financial information, with inadequate consideration given to working capital needs, and a scattergun approach to sourcing new funders will result in major delays and even damage management’s credibility. Challenging credit committees will want to know that the business is robust, the turnaround plans are realistic and that they can get their money back in the event of failure – before they sanction a new lend. By following these three simple steps – financial reporting, working capital management and working with advisors – a business has the best possible opportunity to secure a refinancing deal. Get these basics right and the refinancing process will be a challenging but enjoyable one. David Gilbert is business restructuring partner and refinancing and rescue finance specialist at BDO LLP.
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