Securing additional working capital facilities from banks in the current climate

By Jamie Ritchie, Corporate Finance Director in the Aberdeen office of Scotland's largest independent accountancy firm, Johnston Carmichael. 

Dealing with the banks is very different now compared to the days when they were driving for growth in market share, in the period leading up to the banking crisis.

Notwithstanding the ongoing market commentary around the challenges in achieving bank support, in the main, banks have moved from a position of being largely closed for business at the height of the crisis to a position whereby they are keen to support the "right opportunity".

The "right opportunity" by definition will typically be one which presents credit risk consistent with the current appetite and that delivers an appropriate return for the capital employed.

Therefore the most successful way of securing additional debt, renewal of existing facilities, or even when discussing forecast covenant breaches, is to present a fully considered business case supporting the request. 

Even when you have a strong, long term working relationship with the bank, given the change in their requirements it is important not to assume or leave to chance that history/track record on its own will deliver the support sought. 

The company will benefit from being proactive in demonstrating to the bank that they have fully considered, before submission of the request, the implications and "affordability" of the facilities being sought.

This can be best achieved through well prepared face-to-face meetings and presentations, followed up with the provision of a robust integrated business plan. This must be supported by relevant financial and commercial information, covering both historic and projected earnings and an overview of the key risks, challenges and opportunities the business faces in its core markets.

A professional advisor can add valuable support by challenging the information before presentation and also in mitigating the time commitment associated with the process.

Furthermore, it is also important to demonstrate the purpose of the request. This can range from structured funding for a specific purpose - for example, an asset purchase or business acquisition whereby the purpose can generally be more easily demonstrated.

The main challenge can be around securing additional ongoing working capital facilities, particularly against the backdrop of the current economic environment.

Whilst the UK has technically exited recession, trading conditions remain challenging and the delivery of quality robust information, systems and processes are important for both the business and the key stakeholders - for example, the banks.

Therefore, before presenting a request for additional working capital support, a business should ensure that its house is in order and that the working capital investment is being managed tightly.

A key influence on any company's working capital and cash flow requirements is the lock up period in investment of working capital items. Various steps can be taken to reduce this lock up period including:

• Issuing invoices once the service is complete or goods provided; waiting to the end of the month before invoicing will mean financing that amount for, on average, an additional 15 days.
• Considering the cash flow impact and building this into the commercial agreement.
• Ensure outstanding debts are proactively managed on a regular and timely basis.
• Any action required for customers to release payment, for example copy invoices, is carried out as soon as possible.
• Ensuring that any contract lasting longer than a month is structured in order to allow stage payments to be invoiced as the work progresses.
• Where the work concerned can result in variations where possible ensure these are agreed and documented at the time they are requested. Agreement upfront should limit the time that funds are outstanding and avoid protracted negotiations.
• Encouraging customers where possible to settle their invoices by way of a fixed standing order or direct debit.
• Active management of stock and work in progress.

Ensuring that the above matters are considered in the normal course of business will mean that a "true" working capital need can be presented to the bank. In addition, this also has the potential to avoid the additional costs and time commitment associated with requesting increased facilities.

A request for increased working capital facilities as a result of poor internal management will not be attractive to a lender and also has the potential to mask underlying trading issues.

With more focus on the depth of credit assessment, being open minded to more structured debt instruments such as asset based lending products or confidential invoice discounting can also assist in securing additional facilities. 

Notwithstanding the improvement in credit markets in recent times, given the ongoing challenges facing the economic environment it is unlikely that the information requirements or additional credit checks will ease in the foreseeable future.

Being proactive, well prepared, confident in internal processes and able to deliver quality robust information in a structured format to the bank can give the company more control over the agenda for the discussions and allow a clear demonstration of the appropriateness of the request.

For further information, please contact Johnston Carmichael's Aberdeen office on 01224 212 222.