Plan for a tighter lending climate

Apr 30, 2008

A FEW years ago, an uncomfortably high default rate in a section of the home loans market in the USA would have been of very little interest to the vast majority of people living outside North America.

Today, in an interconnected financial world where banks parcel up parts of their loan books and sell on debt to other lenders and investors, the default problem has had obvious global implications.

The perceptible tightening of the credit markets as banks reassess the risks associated with their lending policies is already having an effect here in the region. Money is starting to become less available and more expensive.

But what does that mean for businesses that rely on banks for working capital or loans to fund growth?

At times like this, lenders will want to ensure they are only supporting quality businesses and management teams. This means that businesses should not be complacent. New loans or renewed overdraft facilities may not be so easy to come by in the future so it is important to plan now for a tighter lending climate.

A good first step to take is to reduce your reliance on bank funding by improving cashflow management. In particular, ensure invoices are sent promptly and, once you have billed customers, insist they pay on time.

Always stick to your terms and conditions. If you require payment within 30 days, let your customers know that means from the date of the invoice rather than from the end of the month when the invoice was sent.

A proactive credit control policy offers a double benefit. Not only will it improve your company’s cashflow situation, making you less dependent on borrowing, it will also reflect well on you and your management team when you do approach a bank to borrow additional funds.

However, if you are borrowing to finance a forward-looking growth strategy, the bank will not only want to see historical figures but also projections of future earnings. Essentially, it needs to feel confident that you are in a position to meet its repayments on any sum advanced.

If you are planning an acquisition or the purchase of new equipment to ramp up production, the key question will be whether the returns from the project will be sufficient to enable you to service the debt.

It is your business plan and its projections which will provide the lender with the reassurance it needs.

Finally, it is worth remembering that banks tend to be impressed by strong management teams. If you and your existing managers are overstretched, be prepared to bring in new talent.

In many cases, the bank may suggest a stronger line-up. But do not hire someone simply to satisfy the bank. Think of it as a way to improve performance.

The turmoil in the banking sector may or may not result in the further escalation of the credit crunch but, by taking steps to ensure that your company is attractive to lenders, you will also create a better business.

For more information or assistance, telephone 01908 687800, e-mail mail graham.bushby@bakertilly.co.uk or visit www.bakertilly.co.uk

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