How to Secure the Best Terms when Refinancing your Business
Before even thinking about the best option for refinancing your business you should take a calm and dispassionate look at why you think it’s necessary.
Positive reasons will include an injection of capital to invest in new equipment or premises needed for expansion. Here, you need to be confident that the extra business will generate enough margin and cash flow to deliver an acceptable return once you’ve deducted the interest charges for the finance.
In other cases, businesses might be trying to simplify their finances because they are juggling credit cards, lines of credit, overdrafts and merchant cash advances (unsecured loans) to ensure they have enough cash for payroll and to satisfy creditors. In this case there are two critical questions: is my business actually viable, and how will we manage our finances more effectively in future to ensure we won’t default?
Sometimes, it’s simply a short term cash flow issue that needs to be managed. Whatever the reason, being in control and having reliable management accounts is essential.
Refinancing your business isn’t easy. High street banks promote the fact that they are open for business, yet getting loan facilities can be difficult. Lending criteria have been tightened and it’s increasingly likely that any loan will have to be secured against an asset such as equipment, machinery, debtors or stock.
If a secured loan from your bank isn’t appealing or feasible there are plenty of other regulated lending institutions available. These will typically charge a higher rate of interest than a high street bank. Interest rates will depend on the perceived risk. Financial consolidation using this route may make sense but you should have a plan that means you are not reliant on loans with high interest rates in the longer term. These simply eat away your net profit.
Equity funding is often more expensive than debt funding. Equity investors could, however, help spring your business to the next level, bringing skills, contacts and experience that your business lacks. Equity lenders include angel investors, venture capital, private equity and private investors.
Poor returns on savings are leading investors to look at other ways to generate a return on cash. Crowd funding is increasing in popularity through platforms like Crowdcube and Kickstarter. Certain types of business are more appealing to these investors (technology, lifestyle and environmental, for example). Funding is more likely to be secured if it is for something specific such as scaling up production or sales. You will need to invest in creating a persuasive and professional pitch.
Listing a Bond
This is a very interesting form of debt that we have recently helped a client with. It is a relatively costly way to raise funds, but for our client it worked. Bonds are listed on the platform (with details behind the company) for a specific period of time. The terms of the bond and range of interest rates are stated.
Potential investors bid for how much they are prepared to lend and the interest rate they are prepared to lend at. If an investor offers a lower rate of interest during the ‘auction’ period the higher rate investor will be ‘kicked’ out, with an opportunity to rebid. The more appealing and less apparently risky the investment the lower people will bid.
Stock Market Flotation
Again, a costly exercise. It is geared at driving higher amounts of equity and allowing the current shareholders to realise a proportion of their investment. The Alternative Investment Market (AIM) – often referred to as the junior market – has regulations less onerous than a full listing, but levels of investment are lower. A full listing is a challenging process (one which I went through with moneysupermarket.co while at KPMG).
Understand your Finances!
When raising debt or equity investment, you simply have to be on top of your finances. If you can demonstrate a coherent understanding of the past trading performance of your business, along with robust forecast projections, you will have a much better chance of securing the funding you need on acceptable terms. Robust monthly management accounts are essential.
If you are looking for a short term overdraft requirement from your bank, then hit this head on. Never try and avoid the fact that you have a cash flow challenge looming. Approach the bank with your projections, explain the circumstances and work from there.
Nobody likes surprises, especially banks! The last thing they want is a telephone call with short notice saying that you cannot pay wages and you need a short term overdraft. Being prepared demonstrates to a bank that you are in control. Businesses often have temporary cash flow pressure so it’s not something to be embarrassed about.
Being in control of your finances will improve your chances of securing the investment you need, whichever route you choose.