Getting the finance you need to ensure business success

Business lending is shrinking as banks continue to favour home loans over business loans in their short-term approach to capital use and returns. It is stifling the economy and it is a major frustration for businesses that are seeking capital to fund their growth. In their recent submission to David Murray’s financial system enquiry, Industry Super Australia confirmed that the amount of commercial lending for every dollar of residential property lending has plunged from $3.84 to $1.62 over the past 25 years. The land of opportunity has become the land of property.

How do borrowers navigate these changes? Communication between borrowers and lenders is the key to a successful banking relationship. Bankers do not like surprises. As a borrower, be proactive and provide financial information that is both timely and accurate. Prepare and deliver on financial forecasts and projected financial covenant ratios. These add to a borrower’s credibility and offer opportunities to negotiate during the loan renewal process. Additionally, business owners should stay focused on their core business and have a solid business plan with contingencies in place.

So businesses who are seeking funding need to carefully consider the way they frame their finance proposal to their banker, positioning it in the best possible light. A professional, well-thought out application with strong supporting documentation is critical. Understanding what banks are looking for will help you get it right first time and improve your chances of success.

Banks typically look for three major elements when they assess your business’ credit risk. These are commonly known as ‘The three Cs’.

The first critically is ‘character’.

Bankers will assess your character by reviewing a range of documents that provide information about your history, track record and experience in business. They are seeking to understand your commitment to a relationship with the bank. Considerations include:

  • Have you been able to meet your forecasts?
  • What is your repayment history like?
  • Do you do what you say you will do?

The bank will also want to see that you have plenty of ‘skin in the game’. Are you contributing enough to your own cash or equity to the purchase or new project?

The second thing a banker will look for is ‘collateral’.

Here the bank ‘credit department’ reigns supreme. They will be seeking all the first mortgage “bricks and mortar” security they can get their hands on supported by a mortgage over your equipment, other assets of the business and personal guarantees from directors. Think twice about pledging all of your assets if you can avoid it as it limits your borrowing options in the future.

Thirdly, a banker wants to look at your ‘capacity’.

They need to know that your earnings are sufficient to pay the loan back without creating distress. When you apply for the loan, you will be asked to outline all of your income, and provide comprehensive financial data on the business. These will include cash flow and profit and loss forecasts and a robust business plan.

Once you have satisfied the ‘three Cs’ there remains much devil in the detail. Your ranking in this area will determine how much negotiation leverage you have around some very important final points namely:

Covenants – These are the ratios and conditions that the bank will monitor to ensure satisfactory performance of your loan. They may include the ageing of your debtor’s maximum, stock levels and interest cover (the number of times your net profit exceeds your interest bill). Breaking these covenants give the bank the power to charge penalty interest rates and even call in your loan. So it is sensible to ensure they are achievable. While it is important to monitor them once in place, practically they are usually regarded as a guideline by the bank and a lever to deal with relationships that have deteriorated beyond repair.

Security – We live in difficult and uncertain financial times. While it is necessary to ensure the bank has ‘sufficient’ security, do not be overly generous. Look to exclude the home and personal assets where possible. Maintaining separate banking relationships for business and personal loans can give you options and keep each bank on their toes.

Repayment terms – Interest only terms take the cash flow pressure off your business by excluding the additional burden of the extra loan portion payment particularly in the early period of the loan. Banks however are keen to see a start to the repayment of their loan and are reluctant to extend interest only beyond two to three years.

Even if you satisfy the three ‘Cs’ and all other lending criteria you may experience variations between banks so it’s important to get some advice. Some banks have particular industry focuses (and usually specialised products to match) and others will seek to reduce their exposure to a type of business purely because the bank has a high total exposure to that area they are seeking to reduce on a pure risk balance basis.

In a challenging borrowing environment a thorough understanding of how banks assess your position; a well thought out finance proposal; and careful consideration of the terms will give you the best chance to obtain the finance you need to ensure business success.

New financial year cost savings

A challenging economy requires careful cash management to sustain your business.

Tough decisions are necessary which tend to involve workforce reduction and increased productivity from existing employees, both crucial to examine. However, if businesses look beyond labour, they can often find additional ways to drive meaningful long-term cost reductions. Here are a few areas to consider –

1.  Product lines and customer segments
Many businesses have product lines or customers that fail to generate meaningful profitability, or worse, generate losses. The Pareto Principle — the 80/20 rule — often applies; many find that the majority of their profits are generated by a relatively small number of products or customers. By simply shifting energy from less profitable products or customers to more profitable ones, companies can dramatically improve profitability.

2.  Outsourcing
Outsourcing Many businesses are gaining significant cost and operational efficiencies from outsourcing non core activities. Careful analysis including the proper allocation of on costs and overheads will reveal these functions usually cost much more in dollar terms and distraction that perhaps thought. Areas such as payroll, HR, IT, bookkeeping and even entire finance functions may be better performed by specialists who can deliver volume and expertise benefits to your business allowing your team to concentrate on strategy and execution.

3.  Inventory
Many manufacturers and distributors are still dealing with excess inventory levels, which can lead to unnecessary carrying costs and negative cash flows. The most profitable companies effectively use material requirement planning systems (MRPs) and/or enterprise resource planning systems (ERPs) to reduce inventory levels without running the risk of exhausting supplies.

4.  Suppliers
Businesses can often reduce general and administrative costs through techniques such as supplier consolidation and/or the implementation of formal tender processes. Think about the number of departments or locations using different suppliers for routine products such as office supplies. Then, think about how often purchases of such items are made on an ad-hoc basis without pre-negotiated pricing terms. By consolidating vendors and negotiating terms with selected suppliers, companies can leverage purchasing power to reduce general and administrative costs.

5. Employees
Whether your business has 20 employees or 2,000, it never hurts to engage them in cost-reduction initiatives. Because they are in the trenches, they often have first-hand knowledge of areas of waste. By soliciting their feedback and implementing an incentive system to reward them for cost savings, businesses often decrease costs and increase employee retention.

While there is no single solution for cost reductions that applies to all businesses, learning more about what other businesses have done can spur innovative strategies that lead to long-term improvements in profitability. By tackling these issues now, you can drive near-term increases in profitability and ensure you are prepared for any future economic difficulties.

The 7 Keys To Billion-Dollar Success

Peter Bond, Billionaire Entrepreneur and CEO of Linc Energy joined us last month for Prosperity Advisers’ Business Leaders Dinner.   

The dinner was part of an occasional series to showcase the stories of those that have reached the top of their field in business. Previous speakers have included Gail Kelly and Chris Cuffe.

Prosperity CEO, Allan McKeown congratulates Peter Bond (left) on his impressive local to global journey.

Peter’s return to Newcastle and to Prosperity was a blast from the past for him, a man who in 1984, at 23 years old started his career in coal in Lake Macquarie with ‘$500 bucks and a ute’, and by 26 had made millions.  Fast forward 28 years and today he is the worldwide leader of a billion dollar public company “but still at the beginning of the biggest journey” he says.

His is so much more than a local boy made good story.  At Prosperity we had the pleasure of working with Peter in Newcastle and then in Linc’s formative years through our Brisbane office. Peter’s lessons are real, raw and honest.

He shared with us on the night the seven things that made his journey from small business to global company possible.  They are poignant lessons for all those growing a business, particularly those facing tough economic headwinds.  So I want to share them with everyone we work closely with so you too can benefit.


1.  Vision: Know what you want

Peter Bond has one thing that many business owners don’t… an impressive, passionate and unerring vision for the business he wants to create.  And he is proud to admit it.

“As a business owner you need to pursue your vision fearlessly” he said, “You’re the CEO, if you aren’t passionate about it, who is?”

And Peter’s passion extends much further than building a successful business.  In fact Peter is committed to providing the world with an environmentally friendly or ‘clean’ process for converting coal into oil that will change our capacity to produce energy in many countries throughout the world.  “Every country in the world that is long coal and short oil can change it’s energy futures right now,” he said.  This is his vision, and given his impressive track record to date, I have no doubt that he can deliver on his promise.


2.  The People: Get the best – It may take a few years, but keep striving

As your business grows he was emphatic that you need different people in different roles, roles that suit the business’ growth requirements.

“The people who were with you in the first five years are probably not the same people who will be with you in the next five, or the next.  You need different skills as your business grows, and fresh people around you to challenge your team and take the business where it needs to go”.


3.  The Trend – Macro economics matter

As a business owner, you must understand the macro economic trends your business is built on better than anyone else.  “You must understand the price points that make your business successful and the trends that underpin your ‘industry’s growth’.  I was looking at the oil price back in 2004 when it was just $27 per barrel and with a well researched understanding, it was obvious oil was headed higher, much higher.  It is this trend that provides the foundation for Linc.

Peter shared at length his insights into the enormous shift of Asian population into the middle class that is changing the way our world uses energy, driving the commodity cycle and supporting oil prices at $100 or more for the longer term.  “This trend is not going away,” he said.

“And, we know that there are some heavy weights holding the oil price up, chiefly those massive oil producing nations who have low direct oil cost, but high costs of sovereign operations.  Whilst their oil production cost can be as low as $10-12 per barrel, their government operations cost a lot more, putting the effective oil price at between $80-$95 a barrel to keep them funded.  Whilst you could never prove it, whenever the oil price slips a little, the taps appear to slow down, restricting supply until demand catches up.

“It is these very trends that are likely to keep oil above $80/barrel  and pushing over $100/barrel for the foreseeable future,” he said.

“But, these sort of trends are everywhere, and knowing how your business fits into them is critical to your strategic planning and positioning of your business”.


4.  The Systems and Procedures: Lay the Foundation

Linc Energy takes their systems and processes very seriously.  “In a public company, the systems and procedures that you put in place are the foundation of your growth.  At Linc we have been very focused on proving our systems, processes and procedures for creating a clean energy business.  It is these robust systems that enable us to grow the way we have and take the company worldwide”, he said.


5.   Funding and Execution:  How you’ll implement your vision

It is also imperative to know how you are going to fund the growth envisaged in your business plan.  “I wrote a business plan for Linc when it was worth $1 million that planned for the entry of public funding.  It needed it to succeed.  We needed to bring in investors to give us the scale to expand worldwide and execute on the opportunities in front of us,” he said.

“We know we were there at the right time, in the right place and had the right vision for investors. We found that financiers in London and New York wanted to back winners.   So it was critical to demonstrate to these investors that Linc was a company that knew how to execute on the vision and deliver returns.”


6.  Sales and Marketing – Lead from the Front

Don’t underestimate the power of good sales and marketing.

“I am lucky, I have never had to call someone and sell our oil, because being a tradable commodity, oil pretty much sells itself.  But I have had to spend my whole career selling our business, attracting and educating investors, creating a great work culture; and ensuring the right PR messages get out.  Sure I have made a few errors along the way, the biggest of which was stepping away from the frontline for a while at the wrong time.  As CEO I recognize how critical sales, marketing and PR/IR are to our success.”


7.  Risk and Reward: 5X is the minimum

Peter Bond was adamant that he now does very little that has the potential to achieve less than a 5X return.  Whilst to many of us that seems surreal, his explanation was direct and enthusiastic.  “At 15 to 20% returns I am not an entrepreneur, I am a business manager, and that’s not what I am,” he said.

“We’re always pushing in this business, risk and reward go together.  If you go too conservative you actually raise your risk.  If you over analyse M&A deals you can always find a reason not to do them.  But we have got to a good place.  We need to know the deal ticks all the boxes so the facts enable us to do the deal, but the macro completion of a deal will keep pushing and meeting our vision to keep leading our industry in clean energy.  We are focused on keeping ourselves at the forefront of what we do.”

While this is a very brief overview of Peter’s extensive presentation there are take home messages we can all learn from and apply to our businesses.  Whether you run a development company, a mining operation, a manufacturing business or a services firm, you can apply them to your scale of operation and adapt them for success.

From ‘500 bucks and a ute’ Peter’s business interests now span 400 global coal, oil and clean energy assets stretching from Uzbekistan, Alaska, across the US and Australia with more to come.

His story is a truly inspiring one.