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Raising Finance
VO1: Even before the
credit crunch, it was a
popular myth that banks
would only lend to those
who didn’t need the
money.
Now, there are those who
believe it’s impossible
to finance a project.
Are they right? What do
the banks say?
More importantly, what
can be learned from
businesses that have
successfully borrowed?
CB1: Businesses across
the Highlands and
Islands are facing very
challenging times at the
moment. Some people are
looking at trying to
raise finance for new
developments and other
people are having to try
and restructure their
existing financial
arrangements.
What this film looks at
is some examples of
people who have
successfully done that.
The key to it is being
well prepared. Having
very good, well-prepared
business plans for going
forward to your
investors.
MJ1: We were in the
midst of the
foot-and-mouth crisis
when we came here and
farm incomes were
frankly dire and we were
looking for a proper
diversification that
would bring a realistic
income into the farm.
VO2: He found it. There
could hardly be a larger
symbol that banks will
still lend to the right
project. Last summer
while the financial
world was going into
meltdown, Michael
Johnson, the owner of
Belnamoon Farm, went
into the electricity
generating business. He
financed this £1.2
million project.
MJ2: It wasn’t easy, and
there isn’t somebody out
there with a sort of
suitcase full of cash
that’s going to throw it
at you. You’ve got to
make your business case,
and a proper business
case.
VO3: In the end he had a
choice of three banks
willing to lend the
money. Surprising?
MJ3: Not particularly,
because it’s a good
business. Any banker
worth his sort can
recognise a good
business case, and if
you can make a good
business case, you’ll
get the money.
VO4: That seems to be
the key because Michael
Johnson is planning to
erect two more turbines
alongside this one. When
they’re running, the
electricity they
generate will be sold
and fed into the
national grid.
MJ4: For companies that
do have a good business
model, that are sound,
it will be tough, and
you’ll have a hard case
to make, but I think at
the end of the day the
bankers will listen to
that.
VO5: Will they? Surely
the very definition of a
‘credit crunch’ is that
it becomes more
difficult to borrow.
Surely, the banks must
be more reluctant to
lend money now.
KP1: There is that
perception out there at
the moment but I can
absolutely assure
everybody that the Royal
Bank is open for
business and we will
continue to be open for
business, looking to
help our customers
through their ongoing
requirements
VO6: But has your
criteria changed for
giving loans? Are you
stricter?
KP2: No our loan
criteria hasn’t changed
at all. The fundamental
cost of lending is about
the ability to repay, so
we work with our
customers to understand
what income will be
generated to cover the
costs of any additional
borrowing but also the
cost that they need to
run their businesses as
well and that is the
fundamental principal of
lending.
They need to have
thought through what
their requirements are,
what costs are involved,
but also what sort of
income is going to be
generated as a result of
using those funds and
what the ultimate output
is going to be. So we
work with them to
understand through
cashflow management what
income, what expenditure
is likely to go overhead
even from maybe a worst
case scenario and then
working to establish how
that payment will be
ultimately funded.
VO7: While the banks
insist nothing has
changed that’s not how
some on the other side
of the counter see it.
PC1: What your finding
is that banks are most
certainly reviewing
overdrafts more
carefully and looking
more carefully at the
renewal of loan
facilities. What we’re
seeing at a practical
level is also that
they’re paying much more
attention to the
service-ability of debts
rather than just loaned
values. What I mean by
this is that they’re
making sure that
individuals AND
businesses can actually
repay the interests on
the loans without
relying on the
increasing capital value
of assets as they might
have done more so in the
past.
VO8: So really if your
going to go to the bank
for a loan you really
have to have your
numbers rock solid.
PC2: You absolutely do.
You should always have a
business plan ready if
it’s a business loan.
That goes without
saying. But these will
be looked at a lot more
carefully, and from a
business perspective as
well the business plan
is a key document
because your making
mistakes on paper rather
than in real life, and
you can perform your
sensitivity analysis for
example what happens if
my sales go up by 5%, or
what happens if they
fall by 10, so the bank
manager wants to see
that you understand your
business, your products,
and it also gives you
the opportunity to
carefully review all of
your product lines, your
sales mix, and see where
you stand in the market
place and make any
changes that you feel
need to be made to your
business going into
tough and difficult
trading conditions.
VO9: So specialist help
might be valuable. This
is how an advisor could
help a businessperson
prepare to finance a
project.
Meet Lindsey Kelly, an
advisor herself, today
she is playing the part
of the manager of a food
packaging company. They
want a new labelling
machine for which they
need to borrow £35,000;
they have a potential
export order.
Mark Robinson is a
business advisor who
asks the questions to
which the bank will want
clear answers.
MR1: Now this is clearly
quite a change in
direction for the
business. What’s really
lead you to that
decision, in terms of
justifying, you know,
going down that road?
LK1: Well, I suppose the
last time I looked at
where we were going it
was ‘is this just our
lifestyle, let’s do it’,
or ‘do we want to make
this business, that we
can survive and sell on
or pass to the family’
and we felt that if we
carried on with what
we’re doing we just
couldn’t. So we started
to look at different
market places we could
sell into, really, and
that’s what we came up
with. We have a product
that’s got demand, not
just locally, but
nationally, and
hopefully, in fact we’re
starting to look
internationally which is
even more scary.
VO10: The strategy of
the business long-term
is what Mark is trying
to establish. From that
he can help assess
whether the deal fits
the direction of the
business.
LK2: I suppose the thing
is we have assumed that
the one we’re going to
go for, they’ll give us
everything, whereas they
probably won’t.
MR2: So it’s probably
wise to cut back on
those numbers by a
factor which you feel
comfortable with just in
case you don’t get all
the orders so it’s
probably wise to trim
those back by a factor
of something like, 25%.
VO11: Projections must
be realistic. They are
not guesses, they are
estimations based on
sound research. What are
the contingencies if the
projections are not
correct? The bank will
want to know.
LK3: Finance is
obviously, you know, we
have to look out for it.
But, you know, that’s
what we know we need to
make so the other
figures are almost built
up based on how much we
can get through the
machine, you know,
production.
MR3: And I can see by
even reducing the income
line, as we said
earlier, you’re still
comfortably able to meet
the repayments, so that
looks fine.
VO12: The affordability
of the finance is
essential. If the bank
believes you might
struggle to repay, you
are unlikely to get the
money.
Does anyone actually
come in unprepared
nowadays days?
KP3: Yes, you’d be
surprised how many
people actually do.
We’ve got various tools
and resources available
to us that we can
provide the customer so
that they can plan it
out or we can help them
understand that there is
maybe a need to speak to
some outside financial
expert, such as
accountants or
enterprise boards or
whatever that can pull
together that cashflow
forecast.
VO13: Of course it’s not
just about getting any
loan. It’s about getting
the right loan.
This tractor unit is one
of a fleet operated by
Rock Highland. The
company takes
by-products from
industries like whiskey
making, separates out
valuable nutrients and
reuses them to enrich
land. Changing the way
it borrowed to pay for
its tractors saved John
Matheson money.
JM1: We had to contract
hire the tractors
originally, cost us
around about £1,000 a
month. But as the
business has changed,
become a bit more
profitable; it’s allowed
us now to hire purchase
the tractors. Pay them
off over three years
giving us a substantial
monetary value at the
end of three years, when
we have a machine here
that we can trade in
against a new one. By
doing that we have saved
probably around a £1,000
a month on tractor
repayments.
VO14: Buying each
tractor on HP was £250 a
month cheaper than
renting. With four
tractors he saved £1,000
a month. No wonder
advisers urge all
businesses to consider
restructuring their
borrowing.
MR4: Many businesses
will just rely on their
overdraft; that’s not
necessarily the most
efficient way of running
a business. It can be an
expensive way. There are
a variety of options out
there which are cheaper
and more cost effective
for you. Get advice from
your business adviser,
from your accountant,
and they will help you
to save money.
KP4: They can have fixed
loans, they can have
variable rate loans,
they can have flat rate
loans, so there are a
number of workable
solutions that are
available for them to
suit their business
needs.
MJ5: I would say you
have to make a very
strong case, yes, but
the cash is there.
There’s more cash there
for more projects in the
future. There’s
competition to supply
you with that cash. Make
your case.
CB2: Every business
obviously will have to
develop its own bespoke
business plan. It’s own
projections, and it’s
own cashflow to present
to potential investors.
So if you need some
further advice, get in
touch with your local
HIE office or contact
the advice line and the
number for that is 08000
884 884.
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