Manufacturing News

Raising capital today

AFTER a lengthy period of relative stability, the economic turmoil we have seen over the past 12 to 18 months has certainly shocked many seasoned business people, economists and investors.

The financial world has changed significantly and businesses are continuing to review how they have dealt with these changes, while strategically planning for an uncertain future.

In our discussions with business leaders across Australia, we hear more and more stories of significant changes in attitude from financiers, with respect to margins, fees, terms and loan conditions. These changes are more often than not causing significant pain to the business involved.

Therefore there are distinct advantages to finding a lender who understands your industry. The learning curve is shorter, the loan structures more tailored and the industry expertise often adds value and greatly facilitates the loan process.

In the current market there are some very good buying opportunities out there for astute businesses. But it’s important to look at how you have managed your business during the global financial crisis.

Many fundamentally sound businesses have ridden the economic upswing, with little regard for the cyclical nature of economies and markets.

This has resulted in an unhealthy focus on sales/revenue, with little regard for cost controls and therefore margin and profitability.

Cheap and plentiful debt has meant that many businesses have taken on too much debt, sometimes to pursue non-core investment opportunities.

As the economy and the market have slowed, profitability and cash flow in these businesses have been squeezed.

Many have gamely struggled on, but have exhausted, or will soon exhaust their working capital lines and their financier’s patience.

The end result is that fundamentally sound businesses that require some restructuring, refocus and reduced debt, are being sold for what may be seen as ‘bargain prices’ for smart operators.

When seizing these great opportunities, it is important to consider the types of funding that are on offer:

Cash Flow

As the name suggests this form of financing is based on the cash flow generated within a business.

Typically, the facility amount is determined relative to a multiple of a specific profit measure (usually EBITDA).

The multiple factor is generally agreed for the term of the loan, however, we have seen the multiples increase significantly in the “boom” economy (in some cases greater than five or six times EBITDA) and reduce quickly in the downturn (in many cases two or three times).

Businesses need to have a track record of strong, stable profits, as well as demonstrable future profits to access this style of funding.

Businesses must also be aware that as the risk for the lender is greater, margins are generally higher and they should also think through the mechanics of the facility structure and how that may impact on their business.

For example, in a downturn, if EBITDA reduces and/or a financier reduces the lending multiple, the limit availability reduction can be significant.

Therefore the question needs to be asked; does the business have a sufficient ‘buffer’ to weather this storm?

Asset Based Lending

This provides working capital funding for businesses against the specific working capital assets.

These facilities are structured using an agreed advance rate against accounts receivable/debtors and/or inventory/stock.

Financiers will review the quality of these assets and will look at aspects such as collection history, rebates or offsets, obsolescence, stock-turn and retention of title when developing the appropriate advance rate for the borrower.

Well-managed businesses are rewarded with higher advance rates and the availability of more working capital.

Structured Finance

This is a broad term and can cover a myriad of different styles of finance.

Simplistically, this style of finance is tailored to the specific business, with regard to a unique set of circumstances, for example; seasonality, monetising valuable unencumbered assets.

This style of finance is generally a term facility, with security and repayments linked to the businesses’ unique situation.

Now that we have looked at the types of finance available, it is important to ensure that a company chooses the right lender.

Perhaps more importantly, how do borrowers find a lender who will value them both in good times and when the market shifts? Below are two key attributes that CFOs and financial intermediaries may want to consider when seeking smarter capital.

Patient Capital

When the economy is riding high, many companies have easy access to capital.

But when the economy inevitably turns and the capital markets retreat, a solid relationship with a lender is invaluable.

Seek an established lender who can accommodate your future needs. Does the lender offer various loan structures–cash flow, asset-based and structured–to accommodate changing circumstances? If your cash flow turns negative, will the capital provider show you the door or alternatives?

A financier with a big balance sheet who can support a company’s peaks and troughs is typically more patient as markets ebb and flow. So remember, when searching for smarter capital, it’s important to find the best lender, not just the best rate.

Lifecycle Lender

Not all lenders can back your company throughout its lifecycle.

An emerging company needs funds for capital expenditures, growth and working capital. As it grows, the company may need equity or financing to support mergers and acquisitions or project finance.

When it reaches maturity, the company may need help with spin-offs, recapitalizations or securitizations. If the company hits a bump in the road, it may require corporate restructuring, or plan-of-reorganization financing.

Finding a lender that can evolve with your financing needs can allow you to focus on running your business.

* Alastair Metcalf is the Managing Director of GE Capital,

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