What usually triggers a CFO/CEO or business owner to conduct a financial review of their funding package? Some of the most common reasons are probably pretty obvious:
- Stumbling over hurdles when asking their existing bankers for more money, such as when undertaking an M&A (Merger & Acquisition), buying a property or needing funds to support growth (or the opposite!);
- Frustration with a deteriorated relationship, whether due to high staff turnover, lack of service or inability of the bankers to understand their business and needs;
- Some “water cooler chat” with another business owner/manager, who seems to have much cheaper funding!
One of STAC Capital’s services is to complete a review of a business’s existing funding package and, together with consideration of the business’ strategy, make recommendations as to whether further action is required – be it a restructure of the existing facilities, a refinance to another bank, or otherwise.
Here are some of our thoughts as to when and why you might want to think about a financial review:
The Bank
There are a whole bunch of factors that can influence how badly a bank wants you as a client. External influences are one, such as APRA’s “suggestions” (read: “do this or else”). The banks have many limits to abide by, which are regulated or reviewed by APRA. If a bank has breached or is near reaching such limits, their appetite to write more deals in that market is going to be subdued. That is of course until their limits have been reduced to a more acceptable level.
For example, commercial and development property – known as “CRE” (Commercial Real Estate) and “IPRE” (Income Producing Real Estate) to bankers – has in recent times posed significant impacts on borrowers. Some of Australia’s largest business banks have been providing funding proposals that, to be quite frank, are in some instances a waste of everyone’s time. In other words, they say they want to write the business, but they don’t really.
Changes in credit policies at banks because of their internal views moving, can also impact your finances. There are a number of reasons why banks update and/or change their lending policies in various industries. For example, a bank that has favourable credit policies relative to its peers may write significant volumes of business and thus become overly exposed to a specific industry, creating a situation whereby policy needs to be implemented to bring back some balance.
As with any negotiation in life, understanding what drives the other party is paramount in getting what you want. So – does your bank have optimal appetite for your industry & sector, business size, model and strategy?
The Banker
How often do you find yourself having to tell yet another new banker the whole story of your business over and over again?
I quite often tell the story of how you could take the same deal to two different bankers within the same bank and end up with two different results. Surely not, you ask!
Fact is these days it is pretty rare that the banker you know will be the decision maker.
Banker A understands your business, the industry you are in, and talks to the Credit Manager not only about the positive aspects of your business BUT also the threats and risks you face whilst also addressing how you manage these. Banker B simply focuses on all the positive attributes and leaves discussions wondering why on earth he did not get the outcome he wanted. Credit Managers aren’t paid to make money – they’re paid not to lose it – call them pessimists, but they want to know what might cause the bank to lose money and how you’re going to make sure you won’t be one of those statistics.
Having a banker that understands your business and industry is paramount to an ideal funding package.
The Security
Does the securities structure provide you with access and flexibility that you need from your facilities, along with asset protection that you should value?
For SME businesses (typically family-owned), is the family home still tied up with the business facilities? Unfortunately, the life of an SME provides uncertainty and it is for this very reason that a large proportion of business funding packages in this space requires property security. Of course, the balance of power does lie with the banks in your infant years, however, have you ever wondered at what point you can remove these assets to protect your family’s interests? A strong business, supported by a strong balance sheet may be just what achieves this, however, there needs to be a strategy in place for how this outcome is and can be achieved.
For businesses that already have no property in the security mix, factors to consider might include personal guarantee liabilities (are they joint & several, or limited liability), or the value of or necessity for corporate guarantees.
The Price
Price shouldn’t be everything, but nobody wants to pay more than they have to. Asking someone running another business “what interest rate are you paying?” is usually like comparing an apple with an orange. Think about this as an example – should a brand-new commercial property with an ASX-listed tenant on a 15 year lease and a 50% LVR, have the same interest rate as an old building leased to a mechanic with 12 months left to run on his lease and a 70% LVR?
Business lending is priced based upon two key factors:
- How likely it is that the business won’t be able to repay the loan; and
- how much money will the bank lose, if the loan goes into default.
As such, the only way you can directly compare the pricing of your loan with that of another business, is if both above scenarios above happen to be the same (not likely!).
So how do you know if you’re on a competitive or fair market pricing structure?
So…
The finance waters are arguably more turbulent now than they have been for a long time – as a result, at STAC Capital we are having to engage very regularly with bankers to ensure that we are across these changes, so that we are best placed to understand where you are best placed to secure your funding from.
Over our careers, we have seen countless finance packages – we make it our job to know what particular businesses or assets can achieve in the market. Imagine if you could save 1% on your existing borrowings (that’s $10k a year on every $1m – going a good way towards those private school fees!), or if you could get your home removed from the security mix, or could go to market with confidence to acquire a property or competitor?
Most importantly, although your bankers will no doubt change from time to time, STAC Capital is here to stay. Like you, it’s our business and we are here for the long hall. We make it our business to understand your business, so that you can carry on focusing on driving your business whilst we make sure the funding is there to support it.
Want a financial review of your business’s funding package? Contact STAC Capital today.
