Business Finance: David Merrygold attempts to crack the credit conumdrum

COMPANY owners now face growing financial pressures from all sides but persuading your bank to lend you more money can feel like talking to a brick wall. Nevertheless, if your business is fundamentally sound, then with the right professional support you can get lenders and investors to listen…

Imagine if one of your major customers suddenly decided to extend its own credit terms, leaving your business with a huge shortfall in working capital. Or imagine nearing the end of a multi-million pound project, only to find that your lenders are unwilling to provide the additional funds needed for completion.

Or what if your bank of 20 years had a sudden drop in its appetite for risk, and told your (still thriving) company to reduce its borrowing?

Maybe you don’t have to imagine it, for these are all scenarios experienced recently by PKF clients. These few examples show that there can be any number of reasons why a successful business might have a sudden urgent need for additional funding.

Funding, in particular debt finance from banks, has become notoriously difficult to obtain (and retain) since the height of the financial crisis. Businesses have faced a growing struggle to source the finance they need to sustain their day-to-day operations, and to support their growth plans.

To make matters worse, if the borrower breaches loan conditions or caveats, the lender may then insist on tougher terms and increased margins, compounding the problem. This has led to the common perception that banks simply aren’t lending to growing businesses any more. The reality is somewhat different; banks have in fact lent more in recent years than they did before the credit crunch but what is true is that the goalposts have moved. Following a general reduction in risk appetite, it is harder to persuade lenders that your business is a sound investment for them.

Traditional lenders are increasingly looking for evidence of past performance to support future projections, and a strong justification that the business needs the capital in addition to evidence of serviceability and the existence of sufficient security. In other words, the business must demonstrate that it will be able to repay any borrowings in the ordinary course of business, in a timely manner. Lenders have become much more selective about whom they lend to, and more likely to reduce or even withdraw existing lending facilities. The pressing questions, therefore, are: how do you find new sources of funding,and how can you persuade funders of all types to listen to you?

: : David Merrygold is a partner at the Ipswich office of accountants and business advisers PKF.