”A Banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” – Mark Twain
Mark Twain’s views on the world of finance were directed at US Banks in the 19th century. However, there is, within these words a reminder to add Funding Risk to Cyber Crime, Data Protection and a host of other risks that you have to manage, as a busy entrepreneur.
Identifying Potential Business Risk in Your Current Funding
Now, I should emphasise that I am not proposing that a fresh banking crisis is around the corner. However, what I am going to suggest is some simple steps that you might want to take over the next few months to run the rule over your existing funding arrangements, explore any potential business risks, and if necessary, formulate some mitigating actions.
Organising Your Business Risk and Facility Agreements
Firstly, make sure that you have to hand signed hard and soft copies of all facility agreements for senior debt, Covid related facilities, short term business loans and asset finance facilities. In our experience, there are always gaps, which can present hidden business risk. It is good practice to maintain a summary schedule of all these agreements – the original amount borrowed, purpose of the funding, date drawn, current monthly repayments, interest rate, exit fees if applicable and the final repayment date. Keep abreast of the cash flow implications of adding to this list of agreements, particularly new agreements with relatively short repayment terms. Include any cash-flow funding against contracted income or credit card receipts.
If your facilities are subject to Financial Covenants, these could include, for example, a minimum tangible net asset position, debt service minima, and loan-to-value maxima, among others. Make a note of these on your schedule and establish a system to check compliance both on a ‘look-forward’ basis and by measuring against actual results to help manage any business risks associated with covenant breaches.
Understanding Commitment Clauses
Secondly, examine the commitment clauses – those conditions in the agreement which determine whether the agreement can be terminated, and under what circumstances. Medium Term bank loans may have a set commitment period which is shorter than the repayment term. Record the date when the commitment period ends on your schedule and make a diary note for 6 months prior, perhaps even 9-12 months prior. This gives you valuable time to explore the lender’s appetite to renew the facility for a further period and what conditions and pricing might apply.
Addressing Potential Business Risk With Your Lender
Next, think back to the last substantive meeting you had with your main funder. How long ago was that meeting? What was discussed? Have you kept the Bank informed of all material developments in the business since that date? If there have been changes, then it may be time to ‘refresh your business story’, anticipate any questions or concerns the bank may have about the financial performance of the business and its direction of travel. It is not advisable to leave this type of conversation to the final few months of the commitment period.
Managing Banking Relationships
How do you rate the strength of your banking relationship? Has there been frequent and/or recent changes in your relationship team? How well networked are you within the Bank? – for example have you met the line manager of your main relationship contact, or anyone else at a senior level who knows you, and your business?
Have you formulated a Plan B should your lender exhibit any cooling towards your business sector? Bank credit appetite can be tidal – you don’t want to be left high and dry on the beach.
Examining any business risk takes time to analyse, quantify and formulate actions. It can be an unwelcome but perhaps necessary diversion from growing your business and other priorities. You probably have a lawyer to advise you on property and employment matters, and an accountant to prepare your accounts and calculate your tax liability. You may also have a wealth manager.
The Role of a Debt Advisory Firm in Managing Business Risk
A specialist corporate debt advisor should also be an important member of your professional support team. Debt Advisory firms traditionally served the large and Mid-Corporate market segments. Increasingly this expertise is available in the SME market. Navigating the debt markets remains a challenge for all business owners – an experienced debt advisory firm will develop a deep understanding of the business of the business and your objectives, and is therefore equipped to tell your business story, present your financial results and discuss your business objectives and the finance required to deliver them. They will have hands-on experience of raising finance for a whole range of transactions and their extensive banking network will enable them to select the most appropriate Banks to approach for your specific requirements. A competitive tender process will ensure you get the most competitive terms.
If you would like support identifying and managing business risk Contact Us today.
Martin How
Managing Director
Lily Head Finance
Debt Advisory Services
