Funding in an economic downturn

THE Australian manufacturing industry continues to get a battering, as well as facing major challenges in the wake of a global credit crisis.

THE Australian manufacturing industry continues to get a battering, as well as facing major challenges in the wake of a global credit crisis.

A lack of confidence across the board has stopped banks lending between themselves and the capital markets. All businesses, including manufacturers, are fighting for a share of the limited funds in the market and, adding to the challenge, the cost of these funds has also risen significantly.

On the upside, the Federal Government is providing a 30% investment allowance for companies buying capital equipment before June 30, 2009. This rebate will, to some extent, overcome the effect of the weak Australian dollar. Nonetheless, it remains a risk-averse market.

What to do

So, what can manufacturers do to give themselves the best chance possible of securing finance and managing their cash flow while positioning their business for the future?

Firstly, consider what you produce. Is it relevant in the current economic climate? Can it be sustained through trying times? Some areas of manufacturing thrive during a downturn; others may face more challenges.

Your financier will undoubtedly need a strong business case around the longevity and strategy of your organisation before providing any form of funding and you need to present the necessary information to them as needed.

Secondly, make sure you understand your debt levels. This includes knowing exactly what type of debt you have, when it rolls over and whether those funds are going to be available on an ongoing basis.

With limited capital in the market, companies need to be aware of how much is available to them and what they can potentially access at any given time. Without this knowledge, companies won’t be prepared with the right resources and equipment when new project opportunities present themselves.

Thirdly, start talking to your financier. A manufacturer’s relationship with its financier should be close at any time but particularly so during challenging times.

Only by staying in constant contact with a financer can an organisation gain any concept of what funding is available to them. If a manufacturer is looking to expand, or simply maintain their operations, they need to know whether funding is going to be available to them to meet their capital expenditure needs.

A close working relationship between a manufacturer and its financier means the financier fully understands its customer’s business and can better determine what sort of funding is required.

For instance, it may be that a manufacturer starts using different financiers for the different types of finance.

With today’s capital constraints, it may make more sense to have a number of suppliers for, say, an ordinary bank facility, property finance and equipment finance, instead of bundling it all into one.

Only by maintaining this familiarity with your financer can you really know what will work best for your business – now and into the future.

Lastly, become more granular in your approach to business and financial management.

If you haven’t already, it’s time to get into a rhythm of monthly reporting to ensure you have an in-depth understanding of your business at all times.

Gone are the days of producing a set of financials once a year; companies must be able to provide reports on the current state of their balance sheet, their profit and loss and their cash flow at all times.

Watch your debtors, too. Understanding how you are paid by your debtors, what they owe you and when you can expect to be paid all contribute to knowledge of your own financials. Without this, you are not giving yourself the best chance of attracting and securing the right finance.

What it’s all coming back to is a market that’s lending with risk-based pricing – a far cry from the situation we’ve seen over the past few years.

Manufacturers who whip their balance sheets and financials into shape – and keep them there – are giving themselves the best chance to cope with the current downturn and secure funding when they need it.

Fund seeking checklist:

– Watch your debtors and creditors

– Closely manage your relationships with key clients

– Review the competitive position of your business

– Instigate robust forecasting and financial management.

*Neil McKay is General Manager, Equipment Finance and Custom Fleet, GE Commercial Finance.

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