When was the last time you reviewed your business finance? Given the competitive nature of the financing market, we recommend regular reviews of your finance arrangements. It may that your current arrangements no longer meet your needs or that another provider has a more competitive package.
A good place to start is with your current letter of offer from your bank outlining the terms of your facilities. We would be very pleased to assist you in the review. The following terms are the key aspects we would review.
Structure and facilities
One of the most important aspects of a finance arrangement is its structure. There are tax and risk implications associated with the structure of the arrangement. A few key issues to be aware of are:
- 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 and how could your business utilise them 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. This usually takes the form of a mortgage over property held by the borrower. While it can be a way of obtaining cheaper finance, it can expose you to greater risk however, there may be better options available.
We believe in making your business assets work hard for the business with the benefit of releasing your private property from your business finance facilities. Our expertise in the area of profitability and balance sheet analysis will enable us to advise you on the best way forward. We will look at:
- The security arrangements as set out in your current letter of offer
- The risk this exposes you or your associate to and your comfort with the current level of risk
- The security given and how appropriate it is for the amount of debt still outstanding
- Other alternatives to the current security arrangements.
Cost of Finance
For many, the cost of finance is the most important factor they consider; it should be reviewed regularly. Saward Dawson can review the rates and fees of your current arrangement, in light of the other terms in your business finance, and compare them against other available finance arrangements.
Usually, there is a risk versus return trade-off. The bank may give you a lower interest rate if they can increase the level of security they have on assets. The best option may not be the cheapest one.
KPIs and covenants
Covenants are written into the contract to mitigate the lender’s risk. Not meeting covenants can result in the bank calling in the loan. Covenants can be measured by KPIs (Key Performance Indicators). You should be aware of any KPIs stipulated in the letter of offer and the consequences of not meeting them. 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 (i.e. what are the consequences of breaching the covenant?)
Business finance is one of the cornerstones of business success. “Getting it right” is crucial. Saward Dawson can give you the advantage of our expertise and industry relationships. We have access to a broad panel of bankers and we can seek out alternative arrangements to suit your requirements.