RUNNING FOR COVER

It is often said the problem with banks is that they are constantly trying to loan you money when you don’t need it but the second you need a loan they are not interested.

Hopefully, in view of that which has been discussed above, the reason for this is clear. Secured funding is all about perceived risk. Many people approach the bank for funding some time after they actually needed it. The overdraft limit has been reached, cheques are being bounced and then they turn up to see their bank manager to ask for increased facilities.

Compare this with a discussion with the bank manager along the lines of “

our current performance over the last few months has been ‘x’ as can be seen from our management accounts and the variance from our budget is consequential to ‘y’. We are proposing the following actions to correct these variances. Modelling this revised plan shows that we are going to need increased funding of £z from July for a period of 18 months. Our sensitivity analysis shows that in worst case scenarios the increased funding requirement will be £z+ and will be required for a period of 2 years.”

The question is which approach generates most confidence, suggests a business under control, and hence reduces the perceived risk of providing funding. If you do not want your bank manager to run for cover keep him informed and do not deliver surprises.

This is easy to say and easy to do if you have the right management controls, regular management accounts, reviews of actual performance against forecast, and projections amended to take account of actual results.


INTEREST FREE NON REPAYABLE FUNDING

All conventional funding has a price dependent upon the perceived risk and will require you to undertake various tasks so as to secure that funding. Despite this however it is to conventional funding that most people turn first. However if you are planning your business development you will be aware of the need for funding well in advance and can take steps to release capital so as to reduce the need for interest bearing funding or, perhaps, to remove the need altogether.

The source of this free funding is best explained by an example.

PDC Ltd has been trading for around five years and has a turnover of £2m. Its trading terms are net monthly (equivalent to 45 days) but its average debtor days is 75 days. It has a 60% GP and its average creditor days is 45 days. Clearly it is paying its suppliers to terms which is no bad thing if you want good service.

PDC Ltd is probably not aware of these statistics on its business but if it were it could consider taking steps to achieve the following.

Improve its credit control and reduce its debtor days to 60. When achieved this will release from working capital, to be used else where in the business some £97,000.

Negotiate with suppliers for better trading terms than net monthly. PDC Ltd is a good customer with a history of paying on time. With the right approach there is a good chance of achieving net 2 monthly (equivalent to 75 days). When achieved this will release from working capital, to be used elsewhere in the business some £77,000.

Suppose PDC Ltd visited its purchasing arrangements and discovered that it could reduce its purchase costs by 5%. Forgetting the marginal effect on working capital this will amount to £40,000 savings per year. The actual amount available for reinvestment of course depends upon the effective marginal rate of corporation tax. At 21% this would generate £31,000 per year of extra funds.

We could go on to consider the effect of stock turn improvements and efficiency gains within operating costs but the point is probably made.

Companies form and develop and as they grow they inevitably build in inefficiencies. With some attention significant sums of capital can be released.


CONCLUSIONS

If a company is to be successful in raising funding efficiently and at the lowest possible cost it must be in control of its business and be able to predict, quantify and explain the reason for a funding requirement. This requires clear and achievable business plans with a process of review of actual performance against projections. Projections must then be adjusted to reflect actual performance.

Periodic reviews to unlock the ‘free’ funding tied up within the business should be undertaken. Not only can this significantly reduce the cost of future funding requirements but it will make it easier to raise the traditional funding that may be required.

The introduction promised a view on personal guarantees. When raising funding these will often be requested from the directors of the company. It’s a way of increasing the security against the loan and it can be inferred that it is only a paper exercise since if the worst comes to the worst there would be enough security in the company to see that the personal guarantee did not have to be paid.

Refuse to give the personal guarantee on the basis that the business proposal should stand or fall on its merits. If it does not stand up then perhaps you should reconsider pursuing the proposal. If there is sufficient security and the risk adjudged acceptable then the potential funder will often proceed without the personal guarantees.

If there is insufficient security then perhaps you might consider the PG route but spare a thought first of all for the following. If you have the personal assets to cover the PG if the worst comes to the worst then it may be cheaper to raise the money personally on those assets and loan it to the company. Not only may this be a cheaper route but it clearly displays your risk.

Make no mistake. If the worst comes to the worst the funder will call in your PG and you will probably find that this is payable as soon as the loans are in default instead of when the business assets are realised and fail to cover the loan. Remember that in an administration situation there can be significant costs to be met before the debenture holder is paid. You will probably also find that the PG makes you responsible for any recovery costs and the accrued interest charges for non payment are likely to be on the high side.

Charles Brooks is an MBA graduate with many years experience of raising funds for acquisitions. He is currently MD of Comprehensive Business Management Ltd which provides business strategy/planning services and assists with cost saving, efficiency gain and working capital release programmes. Up to one day free consultancy to assess and quantify the potential for savings is available and if you work with CBM they will guarantee the savings.