Steering your business through troubled waters...

Thursday 14th January 2010 – CTG – a division of ILX Group plc, the company that provides tailored training programmes to the financial community and corporates, today offered businesses practical tips when considering refinancing options to help steer them through another year of economic recovery.

Martin Mitchell, Head of Operations at CTG commented, “Having survived the worst of the recession, cash-strapped businesses are facing a new challenge – increasing demands for working capital as business activity recovers.  As announced at the 2009 December pre-budget report the recovery is likely to take longer than expected.  As a result businesses may turn to their existing bank for help, but previous recessions suggest that many will be reluctant to extend credit lines.  It will be equally difficult to secure new money from new lenders. 

Recent data confirm low lending levels; risk-averse banks are managing down exposures, not looking to lend new money.  This is obvious in the syndicated loan markets, where syndicates are shrinking with each refinancing as banks look to reduce lending and repair their balance sheets.” 

CTG recommends three considerations before refinancing:

1. Capital Markets: AIM has helped numerous medium-sized businesses raise finance this year.  However, closer analysis shows that over 80% of the £808 million raised to July 2009 went to mining, minerals and real estate companies.  Of the other new listings, only one was a non-financial company, indicating poor interest in other industrial and services sectors.

2. Government Schemes and Factoring: The Government is restricted in the help it can provide, so schemes target employment creation and R&D and innovation financing rather than operational support.  However, the Enterprise Finance Guarantee (EFG) offers one potential option.  The Department for Business, Enterprise and Regulatory Reform (BERR) may guarantee a loan provided to a qualifying SME by an EFG lending partner, if there is insufficient asset backing to allow conventional bank approval.

3. Factoring, although expensive, may be a company’s only route to additional funding.  The company gives its receivables as security to the factoring arm of a bank, which then chases the debtors for payment.  In return, the company receives a loan of up to 80% of the value of its receivables.  Banks often offer factoring as a "backdoor" way of improving their position as a creditor when a company is distressed, so business owners should be cautious.  The other problem is returning to normal terms when the economy recovers; banks loathe giving up security once they have it. That said, some business owners find factoring preferable to securing finance with personal guarantees. So new funding may be available through factoring, government assistance or the capital markets – if the business qualifies.  Otherwise, business owners must look to their bank.

4. Maximise the banking relationship: While lending activity has declined, it has not ceased.  Bank managers have some discretion, even though credit scoring is used heavily in setting the basic lending framework.  A business is more likely to secure credit if it has cultivated a good relationship with its bank manager through good management information, frequent dialogue and no surprises.  Comprehensive, timely management information that builds the business’ case will set it apart from other borrowers.  Regular communication is also important.  A company may win a huge business contract and reach its overdraft limit by restocking to fulfil the order.  If the bank manager has not been informed of the reason in advance, this may look like a sign of distress rather than a cause for celebration.  Moreover, this "surprise" may cast doubts on the professionalism, reliability and organisation of the company’s management team.  Context and timeliness is all.

5. Ensure your staff have the right financial skills to reduce business risk: Making sure that your staff have the right skills in key concepts such as the working capital cycle, the importance of cash and the dual effect that is used in accounting will help them make better decisions. Courses are available in a number of flexible formats including elearning, which means staff are not required to take days out of the office. Furthermore, a select number of training companies including CTG will develop and tailor training to meet the specifics needs of the client.

Mitchell added, “At this critical stage of the economic cycle, it is even more important that the bank manager’s expectations are managed, so they feel like an insider. Outside the black and white of the annual accounts, the best evidence of the company’s credit-worthiness is its ability to demonstrate that it is in control of its finances and business activity.  Hence, the quality of the company’s dialogue with its bank manager may be the difference between survival and failure.”

CTG offers courses in finance training for non-financial and financial managers. Details can be found by visiting http://www.ilxgroup.com/finance/default.asp