At CNSA, we have often been tasked with finding the right funding package for businesses experiencing high growth or seeking additional headroom to exploit opportunities and deliver budgets.  

There is not a ‘one size fits all’ answer as each business is unique with differing products / service offerings, working capital requirements, investment plans and speed of growth.   

 

FORECAST & SCENARIO PLAN 

A vital first step is to appropriately forecast and scenario plan to assess; any execution risk, the strain it may put on the existing business structure, and also the level of cash and cash headroom required to deliver.  

Suitable integrated financial models are important to enable more informed decisions (and will also be a core requirement from a debt or equity investor). At CNSA, we are experienced at building bespoke financial models for both internal scenario planning and fundraising purposes. 

After completing the above assessment, if raising debt is the most appropriate conclusion (rather than an injection of equity), navigating the debt market is the next step… 

 

TYPICAL DEBT OPTIONS 

There are many lenders in the market with vastly different approaches and products. Ultimately the most appropriate lender may be different for each business due to unique products, owners, management, company structure, stage of the business lifecycle and rationale for raising funds (I.e. for working capital, acquisition or asset purchase). 

For those established and growing businesses, the following types of debt products are the most common: 

DEBT FACILITIES 

These are typically used for working capital or more short-term funding requirements. Historically an overdraft was the most common type of facility provided by high street lenders, however those linked to some form of security such as sales invoices or stock are more prevalent now. Common debt facilities include; Invoice discounting (a flexible facility available to drawdown based on levels of ‘good’ debtors within the business), stock facilities, trade finance, revolving credit facilities and overdrafts. 

Usually, these facilities would not include a ‘capital repayment’ as such, which can save on short term cash flows and debt service covenants, however the aim would usually be for the drawdown or reliance on the facility to reduce overtime. 

ASSET BASED LOANS 

These are loans secured against specific assets, which can include assets such as Plant and Machinery and property.  A loan is typically advanced in full on day 1, with both interest and capital repaid over a period of time.  The repayment period (and interest cost) will differ depending on the quality of the asset – a plant and machinery loan will typically be repaid over 3 – 5 years, and commercial mortgages could be up to 20 – 25 years.  This type of finance is commonly referred to as ‘asset finance’ or a ‘commercial mortgage.’ 

CASH FLOW LOANS 

This is a loan primarily assessed against the business profits and consequently the ability to service debt.   The pricing (interest cost) of these loans tends to be higher than invoice discounting or asset finance (as there is not a direct source of security – instead, this will usually be a fixed and floating charge).   

There are many different options available to borrowers, with two main options at either end of the spectrum being:   

1) An ‘amortising’ loan – this is a traditional loan whereby capital and interest are repaid over a set period.  

2) A ‘non-amortising’ loan (often referred as a ‘bullet’ repayment or ‘interest only’) – this is where only interest is repaid through the term with the expectation that the outstanding balance of capital is paid in full at the end of the term from cash reserves or via a refinance.   

Lenders can also offer a combination of amortising and bullet loans depending on the specific scenario and to help balance growth targets, forecast cash headroom and debt service costs. 

The above products have a wide range of differing pricing based on level of security, ranking in the case of insolvency and ultimate lending risk. 

CNSA can help you navigate the several types of products, and the benefits and risks with each to ensure the debt structure and pricing is suitable for your business. 

 

DEBT PROVIDERS 

How to identify the best debt provider for your business? 

As with any core strategic decision, this will depend on many factors driving your decision.  For instance, certain lenders and types of debt options will be cheaper, however they may not provide enough headroom to fulfil immediate and medium-term growth plans. 

Others may allow more flexibility and headroom to grow (and accelerate growth via acquisition) but will be significantly more expensive. 

Working with us to scenario plan and assess your ultimate goals and growth plans will assist in appraising returns analysis and finding the best lender and product for you and your business.  This may be one funding partner to help execute the short and long-term plans, or an initial funding partner to help execute aggressive growth plans, before refinancing to a more affordable lender for continued steady growth. 

Lenders have different risk appetites, sector focus, availability of funds, and will offer varying product options such as only asset-based lending or cash flow loans. 

Ultimately, do not overlook the personal relationship as it is important to trust your funding partner will be there with you during your journey (which may involve some challenging times along the way). 

Using our extensive knowledge of the funding landscape, CNSA can assist you in finding the right partner for your growth plans. 

 

BASE RATES 

We would not be able to write an article in 2023 without mentioning base rates…the chart below shows the rapid rise in base rates, which is impacting business borrowing. 

At the time of writing, the base rate is at 5.25% after experiencing a rapid rise – as shown, businesses have benefitted from a sustained period of low rates post the 2008 recession.  

For businesses, this significant rise will have resulted in much higher debt service costs (as most products are priced on an interest % margin ‘above base rate’), and consequentially will have also impacted on performance against banking covenants.   

Speculation at this time is that we are nearing (or maybe at) the top of the curve, however whichever way the rates move, this chart highlights the need to have detailed and integrated forecasts in place to ensure you can model various scenarios against forecast performance, cash flows, cash headroom and debt serviceability (to ensure that you have the right funding package for your business’s goals without over-leveraging or stifling cash headroom). 

 

SPEAK TO US 

There is a vast array of lenders providing many different lending products for growing businesses.  It is therefore challenging to find the right option for you and your business without expert help. 

Talk to CNSA to help you appraise what fits best for you and your business and to execute your funding requirements. 

Also, as both M&A and debt advisors, CNSA can advise on both funding requirements and M&A advisory for acquisitions, seamlessly providing a holistic approach to a M&A project requiring funding.