Negotiating Business Finance in the Upswing


 It seems there is light on the horizon. House prices are on the up, meaning a secured loan offers less risk to your lender. Trade is slowly improving, so increased sales should mean increased profits. The falling pound means good news for exporters and that UK made goods should be more competitive in their home market (even some call-centres are being brought back to the UK from the third world). Although taxes will clearly need to rise, consumers are willing to spend if the price is right. Even labour costs are falling.
Before you get too excited, however, remember two maxims:
  • Insolvency risk is greatest in the upswing phase of the economy.
  • Most businesses fail, not because of lack of profitability, but because of lack of cash-flow.
These are important to remember, because your bank is acutely aware of them and the fact is that at some point, the Government is going to have to reign in public spending – hard – which will inevitably mean that consumer demand is affected. This will be compounded by the need for interest rates to rise, which is widely predicted for later in the year.
This combination of factors makes it difficult to predict whether bank lending will get easier to negotiate in 2010. However, what we have seen in deals that are taking place is that banks are looking more carefully at the security offered in the deal and are trying as hard as possible to improve their lending margins. It isn’t all about the cost of the loan, however – in order to negotiate the right deal, here are some tips of other things to think about:
Borrowing Generally
  • Make sure your lending proposition stands up on a cash-flow as well as a profitability basis and be able to defend your sales forecasts.
  • Overdraft or loan? With an overdraft, you pay interest only on the amount you borrow plus an annual renewal fee (if the bank agrees to renew your overdraft). With a loan you pay interest in the whole sum from day 1, but normally at a lower rate and the loan cannot be recalled. Many loans have (in effect) penalties built in for early repayment. It is common advice for  ‘hardcore’ borrowing to be by way of loan and borrowing to finance assets and overdrafts to be used for short-term borrowing.
  • Don’t forget to read the small print. The legalities may one day be important to understand. Don’t just sign the loan agreement and forget it – take advice.
  • If you are borrowing only to finance greater sales, factoring or invoice discounting may be for you. These agreements are complicated and often impose significant extra accounting costs but can be a good way of reducing risk.
  • If you are self-employed, the lender’s ‘long stop’ is you and your assets. Take advice on how to minimise your risk before you borrow.
  • If you are worried about being able to stay within your overdraft limits, it is often worth borrowing on loan to make sure you can: penalty charges and interest rates on unagreed overdrafts can make them a very expensive way to borrow.
  • Credit cards. You may be tempted to use your credit cards for finance. This can be very risky as if you incur interest charges on a credit card, these will be much higher than normal commercial lending – and you won’t get tax relief on the borrowing.
  • Never borrow from an individual (particularly friends or family) unless you have a proper legal agreement in place (or want to risk a falling-out). 
  • Remember that the greater your exposure in respect of any loan, the less ‘spare credit’ you will be regarded as having for other borrowing.
Company Borrowing
If borrowing for a company, consider in addition:
·        Whether you are prepared to give a debenture for the loan (a debenture will give the bank security over all the company’s assets. This improves the bank’s security, but makes missing loan repayments dangerous, as the bank will have the right to appoint an administrator). Giving a debenture may reduce your cost, however.
·        You may be asked to give a personal guarantee. Take advice before agreeing. Again your assets are on the line.
·        If you borrow money personally and put it in your company, tax relief on the interest might not be available. This can make a cheap loan quite expensive after tax.
Borrowing sensibly isn’t just a matter of signing an agreement, taking the cash and making repayments. Negotiating loan finance successfully is easier if you are advised by experienced advisers who understand fully the legal implications of the documents you will be asked to sign.

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