Unstable conditions prompt heavier scrutiny from lenders
Corporate finance lenders are paying closer attention to financial numbers beyond just profit and loss due to the previous disruption caused by COVID-19, a non-bank lender says.
Finance professionals seeking out finance for businesses may need to provide lenders with more detailed financial information in the current environment with lenders starting to take a more cautious approach, says Epsilon Direct Lending founding partner Joe Millward.
“My number one piece of advice to CFOs or business owners seeking finance is to get your house in order and ensure that you’re able to very clearly articulate what your profit and loss, cashflow and balance sheet have done for the past three years,” Mr Millward told Accounting Times.
“We’re finding right now that because COVID-19 was so disruptive, both from a good and bad perspective, that when we’re looking just at the cold numbers it’s very hard to understand what the sustainable earnings might be based on just a year of the most recent earnings.”
Businesses coming to a lender should therefore be prepared to provide a clear set of financial numbers beyond profit and loss and explain what the variances are of their normal base earnings and what impact they’ve had through COVID-19.
“That’s going to get you well ahead of a lot of businesses that aren’t as well prepared,” he said.
Smaller firms may also need to talk to wide range of lenders and people within the accountancy profession in order to boost their chances of securing finance.
“Talk to your top tier and mid-tier accountancy firms who might be able to advise companies on how to raise debt capital and for smaller businesses brokers can be a good avenue to pursue,” said Mr Millward.
“They should be able to point you in the right direction of not just the obvious participants like the major banks and sector banks but those pockets of non-bank lenders that might be well suited to your borrowing.”
Business should also be prepared for a few rejections before being approved for a loan, he warns.
“Don’t be disheartened if the answer is no from the first three or four non-bank lenders you speak to because the non-bank lending space is quite specialised,” said Mr Millward.
“Different non-bank lenders have very specific mandates so it may not be a reflection on the quality of a business, just that the non-bank lender has a very specific mandate.”
High performing companies in non-cyclical sectors are still able to attract loan funding relatively easily despite the current environment while lower quality companies are now starting to struggle, according to Epsilon co-founder Mick Wright-Smith.
“We continue to see high quality, performing companies in non-cyclical sectors continue to attract loan funding to finance step-changes in their business whilst lower quality companies, and those in cyclical sectors are having a much harder time,” said Mr Wright-Smith.
“After 12 interest rate rises in 14 months, the days of cheap and easy money have passed, and we are now in a more regular or normal part of the business and finance cycle which favours better quality businesses with thoughtful growth plans.”
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