Raising finance has become increasingly important to both large and small businesses under the current climate. We look to provide readers with some tips from our experts at Belsize Accountancy:
-Companies must look to optimise their cost of capital through a mix of debt and equity. Firstly a company must work out its current weighted average cost of capital (WACC) and must ensure that this is monitored and updated as circumstances change.
-A company must look to raise debt and equity in line with the income profile of the business. There must also be a match between the profile of assets and liabilities. Some of the larger utility companies have secured debt over 60 years, in line with the life of their asset base.
-Debt is often cheaper than equity but a company must ensure that it does not generate too much leverage in the business. Investors are becoming increasingly cautious in investing in highly geared companies.
-Control your covenants. Tight covenants often hinder the operating capacity of the business and it can be expensive to restructure your covenants if they are not set up adequately first time round. The banks are surprisingly lenient under the current climate as they do not want their clients to fold. Many businesses have found it easier to renegotiate covenants over the past 2 years than would normally be possible.
-It is important to establish a relationship bank. You should look for one that understands your industry and it is advisable to use a bank that has been around for a while and preferably with an A+ credit rating as banks have a higher than normal risk of failure given the issues in the Eurozone. Banks that are supported by their sovereign nation are recommended.
-We tend to look for various qualities in the bankers we use. These include: providing the right mix of services, experienced team, geographical reach, being prepared to lend money, and ability to provide objective advice.
-For our contractor base, we look for banks who can open a business account quickly, the online system is easy to use and have low charges.
It is also important to understand what the banks want, particularly if you are looking for a loan:
-Return on capital employed
-Regular income and cash flow
-Ability to service debt
-Strong and reliable management team
-Bank must be happy with the corporate risk profile of the business
-Quality of information. Banks do not like surprises and must be kept will informed
If you run a well managed business which is cash generative you will not have difficulty raising finance. In fact, strong businesses will be able to secure competitive rates. Growing businesses on the other hand will require adequate security in order to raise finance from the major banks.
We hope you have found this article useful. Belsize Accountancy have a strong relationship with several banks. Feel free to contact us if you require assistance with raising finance.