Allan Kelly, an advisory partner in RSM specialising in debt raising and restructuring, offers a background to the current debt finance market and pointers for businesses to consider when looking for new lending.
2018 has already seen many high-profile company failures including Carillion, Toys ‘R’ Us and Maplin. Whilst the problems associated with these companies have been well publicised, all three have referenced their inability to secure finance as part of their demise.
Demand from businesses for borrowing money remains high but raising any form of finance can be challenging for all but the strongest of businesses.
Historically the first port of call for a business looking to raise or refinance debt was their high street bank. Whilst the high street banks are open for business and continue to lend a substantial amount to businesses, a business may not necessarily fit a bank’s lending criteria nor find the bank’s product offering meets their requirements.
"Given the number of lenders and products available, it is vital for management to use experienced debt specialists to source and structure the lend. "Allan Kelly, RSM Newcastle
On the back of this, the political will to increase competition in the market (particularly for SMEs), “disruptors” looking to use technology to challenge traditional lending, together with different classes of investors ranging from retail (individuals) to institutions looking to increase the return on their investments, have caused the UK debt finance market to rapidly evolve over the last 10 years.
Businesses now have a much wider choice of financing partners across an ever-expanding range of funding products to fill the ever-increasing requirements of businesses. These alternative finance (Altfi) providers include challenger banks; peer 2 peer/crowd funders; direct lenders such as private equity debt funds or insurers; and asset based lenders. They can lend amounts ranging from £25,000 to £10m+ thereby covering a wide spectrum of business requirements.
However, the Altfi lenders tend to focus on niche lending areas such as property (including Durham based Atom Bank), secured loans, invoice finance, stock finance or unsecured cash flow loans but will typically be at a higher borrowing cost due to their own cost of capital being higher than banks. This may mean that more than one lender is required to fulfil a business’s requirements.
With a number of finance options available, how should management ensure that they position their business to obtain the right lending partner and best possible deal? Engage Experienced Advisers
Given the number of lenders and products available, it is vital for management to use experienced debt specialists to source and structure the lend.
At RSM, our national and international presence gives us a very wide-ranging view of what is available across the UK and trends globally. We frequently see incorrect funding structures, inappropriate for the current or future needs of a business, being applied, resulting in pressures on management and increasing the longer term business cost.
Allow sufficient time to raise the debt
The time taken to raise the debt is often underestimated by management and advisers. We are finding that raising finance is currently taking more time than we have historically experienced.
Requiring funding within a short timescale restricts the options available with both lenders and products.
Ideally, a business should start to engage with potential lenders a year or more in advance of financing to build a relationship and allow the lender to have a greater understanding of the business and make the credit process easier. It will also provide opportunities to discuss lending structures so these can be factored into forecasts and tailored before submitting a formal proposition.
Different types of lenders have different information priorities and requirements to satisfy the credit team signing off a lend. A one fits all plan may not necessarily be appropriate, raising more questions and delaying the process, particularly, if different types of lend are being sought from multiple lenders.
A plan should address lender requirements from discussions, proposed structures, and most importantly how the debt will be repaid.
Consider the longer-term cost
Debt has been cheap over the last 10 years driven by the low base rates which has become the norm for businesses.
The cost of debt will depend on areas including credit rating of business, security profile, forecast cash flow performance and debt structure.
Management often focus on the cost of debt but should realise that the cheapest debt is not always the best fit and can be more expensive in the longer term.
Communicate regularly with your lender
Once you’re with your new lender, maintain a regular dialogue sharing good and bad news. What lenders do not like is surprises, especially nasty ones!