23/07/2010
Cash is the lifeblood of business and its injection is of vital importance at certain times. For businesses in the marine and leisure sector, as with any business, where to raise your capital is probably one of the most important decisions you will make. The choice generally is between debt and equity, or a combination of the two.
If you are looking at the equity route what are you giving up and what do you expect in return? Private equity can often provide the leverage, focus and contacts to help your business grow faster than would otherwise be possible, but the price can be high – potentially losing overall control of your business. This might make your overall stake more valuable, but it depends very much on the initial calculation: which will grow the business more, your own stake or the investment of additional equity players? Get it wrong and you could be left with less than might have ben achieved with a more cautious growth policy.
It is clear that the rules on bank lending have radically changed over the last few months and bankers have less flexibility, becoming more risk averse. The government is pushing the banks to lend to businesses on the one hand, while requiring them to boost cash reserves on the other. The traditional big four banks maintain that they are lending at levels similar to the pre-crunch period, but small businesses are still complaining, so what is happening?
The banking sector in the UK exploded during the run up to 2008, with a considerable proportion of new funds coming from abroad. Following Lehmans collapse much of this foreign funding source has simply dried up, leaving the traditional UK banks to cope with what was an over inflated demand for debt.
At Vail Williams, our experience is that the banks can pick and choose who they will lend to and will tend only to back the very good propositions. As to the terms, the simple loan-to-value formula is now less important as the banks look much more towards the sustainability of income streams to cover debt financing. Cash flow is therefore of paramount importance and a business plan demonstrating how the cash flows can be sustained, or even grown, is essential, provided it is accurate and realistic. Of equal importance is the borrower’s standing and experience in operating in the chosen leisure or marine business.
So will there be funding available? For now, maybe, but there is a debt time bomb in the offing with vast amounts of debt in the leisure sector requiring re-financing over the next five years, as previous arrangements set up during the boom years mature. Finding funds to meet this demand will be difficult with banks becoming even more selective in deciding who they will support.
As to the terms offered in the market, these have changed considerably with a reduction in loan-to-value levels and an increase in interest level cover. This return to ‘old fashioned banking’ is to ensure that the banks are nor overly exposed in the event of a downturn.
The Government, in seeking to boost lending, has sought to help small businesses through the Enterprise Finance Guarantee (EFG) scheme. This provides businesses with a turnover of up to £25 million with loans up to £1 million, which can also be used to convert existing overdrafts. The launch of the EFG means that viable businesses which can no longer secure bank lending as a result of the financial crisis can still gain access to additional funds.
However, like its predecessor the Small Firms Loan Guarantee, these secured loans can be difficult to get, with only a few banking business managers being award of the terms or availability. As with any bank loan, EFG loans are only granted to commercially viable businesses. However, since the government only secures 75% of the loan and the banks take the full risk on the balance, the commerciality of extending an EFG loan tends to be under tighter scrutiny. For the banks, this becomes a less attractive option as typically they would look for full security in the current climate.
When a company is unable to offer security, as is required with the other funding options, the EFG is often one of the few options up to the £1 million mark. Beyond that is the realm of the venture capitalists.
At Vail Williams we have a dedicated Marina and Leisure division where we give advice on real estate and commercial property issues to business owners and operators in that sector. We have come across good and bad examples of financial management and investment and work with companies to enable them to take advantage of that experience to benefit their business.
