News } Tabak

Business Sales Market Update - February 2015

Whether you’re looking to buy, start or expand a business you’ll need money. And the two broad ways in which this can be done is by raising a loan or capital.

Raising Money for Businesses   

Whether you’re looking to buy, start or expand a business you’ll need money. And the two broad ways in which this can be done is by raising a loan or capital.  

In this update, I decided to review some of the more common loan options.  The information below may be of particular interest to those looking to buy a business and who are starting to plan their finances.  

Traditional Bank Funding  

Banks are eager to lend. Residential property remains the favourite but there’s plenty of money available for commercial and industrial property, subdivisions and developments - and for businesses.  

Banks remain the cheapest form of finance with low interest rates. They prefer loans with established businesses or well tenanted commercial and industrial property. But we are seeing banks extending their interest to smaller deals that were previously the domain of second tier lenders.  

Most small businesses have their bank facilities secured against property – often the owner’s house or the property from which they operate their business. Other hard security can include other property, plant, equipment, vehicles and stock.  

For established profitable businesses with good cash flows hard security is less of an issue. “Cash Flow” lending is again becoming more common.  

Plant, Machinery and Vehicle Finance  

This is a common form of finance for businesses. Other than the banks there are a number of specialist providers in the market.  

It’s generally used to purchase new plant, equipment and specialist commercial vehicles for new businesses or expansion of existing businesses. It can also be a form of temporary finance using these existing assets as security.  

Raising Working Capital Loans  

Many businesses have a great relationship with their bank, but are unable to satisfy growing orders due to shortage of working capital. The problem is when they want a loan to expand and capitalise on the effort they have put in to growing the business, they're told by their bank “I’m sorry we can’t help you now because you’ve run out of equity in your house. But come back in 3 years time and give us 3 years of accounts and we’d be happy to look at it then”.  

One solution is to use debtors and/or stock to offer as security for the loan. There are a number of variations for this including names such as Invoice financing, Debtor financing, Trade finance and so on. Don’t confuse this form of finance with the “factoring” of old. Most modern systems are seamless, non-disclosed, and provide a “free” debtor management system.   

Debtor and invoice finance has become a more common method of funding businesses and there are more players in the market now.  It is ideal for expanding businesses that qualify and is one of the most flexible funding arrangements available.  Here is why:  

- No real estate, plant, vehicle or other hard security is required.

- Security is over debtors leaving other assets free to raise further funds if required.

- First ranking GSA security can remain for other facilities.

- As the business grows so does the size of the facility.

- The debtors book is often the largest asset in the balance sheet and larger limits may be accessible than offering existing hard security.

- It allows the business to access bulk and early settlement discounts from suppliers.  

Advantages over other forms of asset secured loans include:  

- Property security is not locked up, is safe from call by the lender if any downturn in the business, and could be used for other purposes.

- With hard security it’s the current value of the security that determines the amount of a loan - not the performance of the business.

- Current business performance determines the level of the facility rather that outdated trading history.  

Quite often, a business finance package will consist of one or more of the above.  It helps to do your homework.  Do the spreadsheets and make sure you get good advice.  

If you don’t know who to talk to, we are more than happy to provide you with some direction as we work with many financiers on a daily basis.  

Interested in Business Broking?  

We have a number of opportunities available throughout the country – ranging from Business Broker opportunities to Licensed Territory Ownership opportunities. For example:  

- Licensed Territory – Rodney & Northland;

- Specialist Resort & Hospitality Broker – Hamilton; and

- Licensed Territory – Selected South Island Regions.  

If you would like to explore these or other opportunities further, please register your interest and we can arrange a suitable time to discuss this further.    

Kind Regards,  

 

Alex Smith BBS, BA (Hons)

Partner - Tabak Business Sales

Licensed under REAA 2008

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