As the green shoots of business recovery begin, many of your SME clients will be needing to borrow funds to rebuild inventory levels, hire staff, buy new equipment or run marketing campaigns to help get their revenues back up.
They may even need to pivot their business to the needs of a changed market.
As a broker, working with SME clients to secure a business loan, you are their trusted adviser. Having a good understanding of what lenders are looking for makes you invaluable to your client, and certainly makes for a speedier process with more likelihood of a successful outcome.
From a lender’s perspective, the deeper your understanding of the client - warts and all - the more likely it is you’ll help them secure a loan. The tick and flick approach is rarely successful.
There are three key things a lender will be looking for, relative to the approaches taken by different lenders.
First among these is an unwieldy acronym - EBITDA (Earnings Before Interest Tax Depreciation and Amortisation), which is fundamental to applying for a loan.
Your understanding of the client’s EBITDA position is important for a few reasons:
The reality is that COVID-19 has significantly impacted the performance of SMEs. In fact, accountants and other financial practitioners joke about EBITDAC – EBITDA After Coronavirus.
The major banks generally will focus on largely historical financial information and will seek evidence that the SME borrower has no tax arrears at a time when most businesses have deferred tax liabilities and EBITDAC is materially lower than the previous year.
Other lenders take a different approach. For instance, our analysis of a potential borrower will shift to a more forward-looking view using the cashflow projection. As an example, if the cash receipts forecast shows some conservative growth assumptions over the period June-December 2020, the FY21 projection can be assessed against the historical FY19 normalised results to determine the debt servicing capacity of the business.
Aged debtor and receivable listings will also be important to factor into the receipts, with assumptions of extended timeframes for payments. Provision of Australian Taxation Office and Business Activity Statement reports will allow the lender and borrower to quantify the amount owing and facilitate discussions for repayment arrangements to be implemented.
The second key requirement of the lender is an understanding of the revenue capacity of your client. Put simply, what they are earning in revenue is a rough rule of thumb as to what they can afford to repay in a loan.
Finally, what existing level of debt does the client have? Consider the debt liabilities on their balance sheet, such as: existing loans, vehicle leases, credit cards and so on. What is the ratio of this debt to that magical EBITDA figure?
As an example, we recently worked with a broker who was representing a digital printing business that had expanded into industrial and PPE workwear. Sales had boomed on the back of the COVID-1-induced requirement for PPE, and a number of blue chip clients had been acquired, including banks, hospitals and police. The NSW-based business wanted to expand to other states. They also needed to borrow funds to purchase stock to fulfil growing orders and support ongoing working capital requirements.
The broker worked with his client on a checklist and plan, and subsequently provided a detailed funding submission containing all the information outlined above. He was also able to support the client in producing a detailed cash flow forecast.
This expedited the application to the point where we were able to proceed to discussions with the broker and his client. This resulted in the provision of a $500,000 working capital loan for 16 months, with a 4 month interest expense only period, which the client opted to have at the beginning of the loan.
The broker’s work was invaluable in getting his client to a point where all the salient information was provided upfront, and the discussions with the lender could begin. The frustrating delays and back-and-forth were avoided, instead the process was smooth and swift.
If you work with SMEs, you’ll know that most small business owners are absolutely passionate about their business. That’s why it’s vital for a lender to take a holistic view.
Building a relationship and trust, not only with the business owner but also their broker or accountant, means that broader insights can be gained so that the right level of support can be provided without slowing down the process.
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