There seems to be a constant divide between those looking to borrow money and institutional lenders. On one side are potential borrowers who believe that banks are not willing to support their businesses in the form of loans and advances. On the other are banks which claim there are not enough bankable projects or proposals to choose from. This article outlines some of the options open to companies to improve cash flow through internal changes, and examines how potential borrowers should present a ‘bankable’ proposal and what they can expect in the course of the application process.
Internal sources of funding
Many organisations erroneously believe that access to finance is the beginning and end of all their problems. Sometimes, this is indeed true – cash is the lifeblood of any business. However, many companies go about looking for funding in the wrong way and with the wrong mindset. Before a firm decides to borrow, it should FIRST exhaust internal sources of funding, which are cheaper.
First, companies should explore supplier funding – also referred to as ‘trade credit’ or ‘spontaneous financing’. Suppliers, looking to grow their sales are often willing to offer generous payment terms, albeit at a slightly higher costs. This type of funding is usually short term in nature; however, purchase of heavy-duty equipment can be negotiated for longer periods. The key issue here for organisations is to maintain good relationships with their suppliers by paying promptly and informing them of potential payment delays. Maintaining good relationships with suppliers is imperative, not only because suppliers are important to a company’s success, but also because they serve as references for potential lenders.
Second, firms should examine their processes in order to eliminate waste and identify operational inefficiencies. Manufacturers need to consider how long manufacturing processes take and if they can be reduced, and how long it takes to get products to market and then convert these sales to cash. The objective here is to streamline all internal processes and reduce them to the barest minimum without sacrificing quality. This will help free cash, and reduce the need for borrowing. Furthermore, firms should eradicate any superfluous expenses.
Third, firms need to consider what assets and divisions can be restructured or sold. To achieve this they need to identify which ones are not core to the company’s future strategy, and are no longer serving their original purposes. Some assets can be sold and then leased back, while unused office or industrial space can be sublet. Firms should also seek to encourage debtors to make payments for sales earlier. This can be achieved by offering discounts to clients who pay on time, or choosing to deal with established wholesalers for distribution rather than many retail buyers with questionable credit histories.
Lastly, firms should explore getting existing shareholders to increase their level of shareholding, or admitting new shareholders. Of course, this course of action should be considered in line with the shareholding structure of the company in question, the market conditions, and the type of company – public, private or limited by guarantee.
While careful management of working capital has always been a primary concern, today’s challenging financial environment has made it a growing imperative. Companies with internal sources of funding are able to face challenges more confidently and are more prepared for market uncertainty.
So what constitutes a ‘Bankable’ proposal?
A company may have explored all of the aforementioned options but may still require some external funding to expand, refinance some debt or take advantage of increased demand. In which case, the next step will be to consider a bank loan. When companies are considering approaching a bank to raise finance it is advisable that they carry out some preliminary research before approaching a bank and bear in mind the following:
•Not every request for credit facilities will be favourably considered.
•The fact that a request is declined by one bank doesn’t mean that the same request will not be approved by another.
•Countless loan applications are submitted to banks on a daily basis, so applications need to be of a high standard to stand out.
•Banks need more loan proposals to be approved in order to increase their earning capacity.
Different banks have different areas of expertise. Some banks specialise in, or are more comfortable with, particular geographical areas or different industry sectors. For instance, some banks are regarded as ‘trade banks’ for their strong track record in trade financing. Other banks might be stronger in financing start-ups or small and medium-sized enterprises (SMEs); some others are energy- or commodity-related banks, specialising in funding energy-related companies. Others still are regional banks, specialising in certain geographical areas – Africa, Europe, the Americas or Asia. While some banks tout themselves as all-purpose, universal banks, in practice, most have certain areas of specialty.
As a potential borrower, it is important to take these factors into consideration when looking for potential lenders. An SME, hoping to raise funds from a bank whose strategy is not geared towards SMEs, will find its chances of success significantly reduced. It is possible to discover the focus of a particular bank by looking at its website, annual reports, strategic intent, landmark deals and client list, and by asking other firms within a specific industry or value chain. While this may seem a simplistic approach, repeated failure to do so by prospective borrowers explains why some loan proposals are continually rejected.
Having identified a suitable bank, companies need to answer a number of seemingly obvious but often overlooked questions:
•How much money is required?
•What exactly will the borrowed funds be used for?
•How long will the funds be needed for?
•Will the repayments be manageable within the loan period?
•What can be offered as an equity contribution to demonstrate commitment?
•What can be offered as part security for the intended loan? This can go beyond traditional forms of securities and can include guarantees from established suppliers, marketable securities, credit insurance, insurance bonds, insurance policies or investments and bank guarantees.
Once these details have been established internally, a company can begin to engage a bank with a lot more confidence and clarity. After a formal request is made, usually in the form of a letter, the process is initiated and usually starts with information gathering.
OgucheAgudah is an associate of both the Chartered institute of bankers and stockbrokers Nigeria. He currently works as a special assistant to Nigeria’s minister of Industry, trade and investment with a focus on improving the access of Nigerian businesses to finance. He can be reached on [email protected]