Refinancing for Headroom
When refinancing a business, financial headroom should be an important consideration for those wishing to strengthen for future growth. ABN AMRO Commercial Finance Director Alison Small explains why
As any military general will tell you, even the cleverest strategy rarely lasts the duration of a battle. It’s much the same with business plans. Even the most carefully prepared projections will rarely survive the changes in day-to-day trading, let alone an unprecedented global recession! All businesses are subject to setbacks, such as the loss of a major client, an increase in the price of raw materials, or a dip in market demand.
Such disappointments have, of course, been particularly common over the last two years or so. Few sectors have escaped the recession unscathed and many strong businesses, previously confident in their ability to grow, have had to take radical steps in order to maintain their strength. Even with a recovery underway, the economic environment remains challenging, as cash and stock reserves are depleted. The upturn has not only been patchy, but also has been accompanied by a sharp rise in the cost of key raw materials such as petrol and energy.
More positively, however, business plans must also strive to accommodate any favourable opportunities that may arise. Expectations might exceed in comparison to those laid down in the business plan. This is a significant possibility since recovery brings with it new opportunities, perhaps a major new customer, an opportunity to break into a new market, or a rush of orders following the demise of a competitor. The ability to take advantage of opportunities like these depends on whether or not the business has the necessary cash headroom, which allows the business to respond effectively. Regarding this ability to respond, there remains a concern for both the UK economy and SMEs, in that businesses are increasingly reporting that liquidity is unavailable.
Best laid plans
When companies negotiate credit facilities with their lenders, they often omit to build-in the financial headroom they may need in order to deal with the unforeseen or to accommodate future growth. Why is this important? Well, the running of a business rarely goes exactly according to plan. It’s therefore vital to ensure that the agreed financial arrangements are over and above the requirement suggested by the business plan or recent trading record. Without sufficient headroom, businesses will find themselves unable to take advantage of a growth in demand that may require upfront investment in staff, stock, or capital equipment. When unexpected costs arise, a company needs available liquidity in order to react effectively. If this is not considered in advance, the company directors will have to return to the financier and negotiate anew.
At ABN AMRO Commercial Finance, we understand that circumstances change and we will always lend a sympathetic ear to requests for additional finance. However, it’s much more beneficial to the company to have that financial headroom already in place. This is why we always consider headroom when working with clients. It’s about helping companies find a package that is both forward-looking and sustainable.
In recent months, this has become something of a trend among companies seeking to refinance. During the recession, much of the refinancing we witnessed was survival-related, as companies sought to put facilities in place that would allow them to weather the financial storm. Today, refinancing has taken on a much more positive aspect. Businesses are actively seeking to prepare themselves to meet not only the challenges ahead but also the growth opportunities.
Considering a financial package that delivers headroom starts with the key assumptions made by the business plans and projections. At ABN AMRO Commercial Finance, we work closely with the client, taking the time to fully understand their business. We’ll not only examine the historic financial figures but also look at the forecasts and analyse the business drivers underpinning those figures:
What is happening in the market?
Who are the customers?
How much do they spend?
What is the company’s pricing policy?
What are the overheads?
Armed with this knowledge, we look at the company’s projections and sensitise them according to our understanding of the business and the risks and opportunities that it faces. For instance, we may look at the impact on available cash of the loss of a major client or the financial implications of a new product launch that may require significant spending. By sensitising the figures in this way, we can estimate the required headroom and work with clients and advisors to devise an appropriate package.
Headroom and ABL
In many respects, ABL (Invoice and Asset Based Lending) is an ideal medium for providing companies with the headroom they require. Put simply, businesses can leverage the value of their assets in order to generate the maximum amount of working capital. And since ABL raises finance against a range of assets, a specialist ABL lender can usually provide more cash than a traditional lender.
From ABN AMRO Commercial Finance’s perspective, a primary asset for the business is the receivables, which can be leveraged via our Invoice Discounting and Factoring services. One of the key attributes of our approach to receivables finance is that it brings us close to the client’s business. This close knowledge of the business enables us to provide a package of finance secured against asset classes that other lenders may not consider in isolation.
Let’s take an example. Many of our clients raise finance from us against stock. This is a structure with which we are comfortable. Stock becomes debt, debt becomes cash, and cash is used to repay the advance. Other assets that can be leveraged include plant and machinery, and property, all of which can be utilised to provide additional headroom.
Borrowing against a range of assets builds-in flexibility. For instance, some businesses undergo peaks and troughs in their sales throughout the year and may find that receivables finance doesn’t meet their requirements during the low months. These gaps can be filled by finance raised against other assets such as plant and machinery.
Creating a unique funding package
At ABN AMRO Commercial Finance, we offer a flexible range of services, allowing our clients to leverage cash from all asset classes. This kind of funding package – deploying assets above and beyond those linked to receivables-based facilities – shouldn’t be seen as something purely for businesses at the upper end of the SME spectrum. Companies of all sizes can benefit from leveraging a range of assets, and we can provide solutions tailored across the entire SME space.
Tailoring a financial package to meet the specific needs of the client is crucial, which is why all of ABN AMRO Commercial Finance’s structured packages are created individually. It’s important to get this aspect right and, to this end, we work closely with the client’s financial advisors. Ultimately, companies with sufficient headroom in place are not only futureproofed, but also in a strong position to pursue the strategies that will see them grow market share and achieve their goals. In an environment where companies must be nimble in order to make the most of any circumstance, refinancing a business in order to achieve the headroom factor is an opportunity that simply cannot be ignored.