A question of lending
(continued)
Are banks lending?” It is the question my team is asked time and time again, by business groups, the media and even our clients. While I cannot speak for other banks, the answer at Barclays Commercial is a resounding “yes”. In fact our latest figures underline the fact that we are open for business, with average lending increasing 10 per cent in the first half of 2009, compared with the same period last year.
It is true, however, that there has been an overall reduction in the amount of finance available for UK businesses, particularly as in many cases foreign banks and niche lenders have retreated from the UK market. In the past the finance facilities offered by these lenders allowed for easier access to funds, and this in turn did in some cases encourage businesses to overextend themselves. We have also noted that some businesses who previously would have found their funding requirements more easily fulfilled by alternative sources including foreign lenders are finding that traditional banks such as Barclays are more careful to assess the viability of a lending proposition.
It is also important to note that in many subsectors, demand for debt has fallen as businesses repay loans and look to deleverage their balance sheets.
Impact
There have been several factors that are continuing to impact debt levels in the manufacturing sector. The destocking process, which occurred with great speed during the first part of the year, was a cash positive trend as manufacturers ran down stock and collected on their debtors. This has resulted in improved cash positions for a number of businesses. Also, ‘in case of need’ facilities are in many instances more expensive than has previously been the case, and therefore companies are either cancelling or reducing these to a more appropriate level for their position, while still retaining headroom to move if there is significant opportunity presented in the upturn. In particular, some companies are expecting buying opportunities to appear over the next 12 to 18 months and are ensuring they have access to the necessary finance to enable them to action these, as and when they occur.
One thing that is certain, lending criteria at Barclays Commercial has remained consistent prior to and during the current recession. Companies can do many things to ensure that they are looking their best even before approaching a bank to seek lending. There are plenty of examples in every sector of companies that continue to grow demand despite recessionary conditions, demonstrating excellent management skills as well as sound financial management. Banks will also seek to find out what the ‘Plan B’ is in case things don’t go as expected, they’ll look for experience drawn from previously difficult trading environments, be it within the businesses or amongst trusted advisors.
CAMPARI
When considering financing a good tool to assess your business by, and one that we regularly employ at Barclays, is CAMPARI. This stands for:
C
Character of the business - looking at the management, resources, skills, culture, industry outlook, competition and market.
A
Ability to repay - how is the business going to repay and from what source, this may include performing a sensitivity analysis.
M
Margin - the bank assesses the interest margin based on the level of perceived risk in the proposal.
P
Purpose of the loan - What is the loan for? Does the purpose make sense?
A
Amount of the loan - is the amount appropriate? Can it be repaid? What is the customer’s stake?
R
Repayment terms - how long? Where is repayment coming from? Is it certain?
I
Insurance - security against the possibility of the borrower being unable to repay.
Management
Knowledge is key in a bank’s assessments of a valid business. Management must be realistic about their aims and understand whether their offering is the most appropriate to their market. Research of the competition and a clear line of thought of how to differentiate the business, giving it an edge, are important factors in the success of a business, and banks will look to see that borrowers have a clear strategy around this - what is the companies USP?
But what should manufacturers be thinking about now that the recovery appears to be on the horizon? Experience shows us that a great number of corporate failures occur after the recession has formally ended and the economy is growing again. The reason for this is companies lack the cash needed to fund growth and they may end up overtrading or overreaching. Manufacturers need to ensure they have the cash necessary to fund them through this next phase.
Investment
History also shows us the best time to invest, if a business can afford to, is during the recession and in the immediate period afterwards, when machines and tooling can usually be obtained quicker and at better prices, so smart manufacturers should be looking at what opportunities may present themselves at this point. With many companies ‘right-sizing’ their businesses in the face of reduced demand there is also the opportunity to retain a more streamlined workforce, but also pick up talent where appropriate. As the global trade winds are now blowing steadily eastwards and the sterling remains relatively weak, for those ambitious enough now would be a great time to consider expanding markets into Europe or the Far East.
Lending alone will not ensure economic recovery; fundamentally it is demand amongst businesses and consumers, boosted by returning confidence, which will be the key driver. For those businesses looking to benefit most from recovery, this should be coupled with good cash flow and head room in lending facilities, ready to take advantage of a recovery opportunity that is just too good to pass up.
To speak to the head of the manufacturing, transport & logistics team call Graeme Allinson on his mobile: 07775 550635
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