When was the last time you reviewed your business finance? Given the competitive nature of the financing market, a regular review of your current finance arrangements can ensure that you are getting the most out of your business finance. There is more to it than just the cost of the finance, albeit a very important factor.
The following are some of the key aspects that should be reviewed regularly.
Structure & facilities
One of the most important aspects of a finance arrangement is its structure. In reviewing your arrangement, the following areas should be analysed:
- In whose name is the finance arrangement and is this the best option?
- What type of finance does your business have? Is it a business loan, line of credit, bill facility, or a combination of the above? Also, how can you best utilise them?
- What other facilities are available? Could your business utilise these facilities more effectively?
- What are the taxation implications of your current borrowings and are they tax effective?
Security is the lender’s “fall-back position” if the borrower is unable to repay the loan.
We believe that making the business assets work hard for your business is a key principle in this area. This may have the benefit of releasing your private property from your business finance facilities.
The following questions should be asked about your current arrangements:
- What are the security arrangements as set out in your current letter of offer?
- How much risk does this expose you or your associate to, and are you comfortable with the current level?
- Is the security given appropriate for the amount of debt still outstanding?
- Are there any alternatives to the current security arrangements?
Cost of finance
For many businesses, the cost of finance is the most important aspect of business finance. The rates and fees of your current arrangement should be reviewed in light of other terms in the finance. Usually, there is a risk versus return trade-off (e.g. the bank may give you a lower interest rate if they can increase the level of security they have on assets).
Key Performance Indicators (KPIs) & Covenants
Covenants are written into the contract to mitigate the lender’s risk. Should a particular requirement (the covenant) not be met, you may be in default and the lender could ask for the facility to be repaid. These covenants can be measured by KPIs. You should ask the following questions:
- What are the KPIs required under the current finance arrangement?
- Can my business meet these KPIs?
- What effect will not meeting these KPIs have on my finance arrangement?
There are certainly advantages in doing a review of your business financing. A little bit of time considering this often overlooked aspect may achieve you significant rewards. We have the expertise to review and analyse your current finance arrangement, your business profitability and balance sheet to advise you on the best way forward. We also have access to a broad range of bankers and through our relationship with Finconnect, if necessary, we can examine alternative arrangements to enable you to get the advantages.