Small business finance contains credit rationing, at noble solutions, we have to pass on these higher borrowing costs to us. You would have seen your business and property investment rates increase markedly in the past 6 months. Also, many of the non-bank lenders that have grown in the past 15 years are now disappearing. They either cannot borrow money from investors at all (through securitisation) or the rate is too high to be competitive. We have seen players like Macquarie Bank and RAMS either leave the market or have to be sold. Many large corporate entities also cannot raise money (through issuing bonds or other securities) overseas and are now returning to the Australian banks for their funds. Accordingly, there is now a big demand on our banks for funding. They are having to prioritise and ration their lending. They are being increasingly choosy about the type of clients they want to lend to and are resetting interest margins higher according to risk.
Facility Reviews is another small business finance requirement, and already I am seeing existing business clients of banks undergoing ‘facility reviews'. Many are being told that they have been assessed at a higher risk margin and that their interest rate has been increased. Others are being told that the bank requires more security or a lowering of borrowings within the next 90 days. You need to be prepared for these reviews and argue your case strongly. You may need to seek alternative funding or change your current mix of funding. Make sure you are being well advised.
Also for small business finance, covenants is another area that many business clients have neglected is lending covenants – these are things like your interest coverage ratio, debt ratio, net profit ratio etc that are found in your finance documents. These covenants are not given a lot of emphasis by clients at the time of securing finance facilities and have not been looked at closely by business bankers during the past few years. These covenants have now become very important and banks are strictly enforcing them. If you breach a covenant it could be grounds for calling in all your facilities. Again, review them, stress test them with different business scenarios and get some good advice on them.
Investors is very important for the success of small business finance, many investors that purchased residential or commercial investment properties in the last 3 or 4 years took advantage of fixing the interest rate on all or part of their borrowings. Many of these fixed rates will be expiring this year. You will find that most banks will default the interest rate to the standard full variable rate. This may be some 2%-3% higher than the generous fixed rates you secured some years ago. Just be aware that if you have significant personal borrowings, you may be able to negotiate a discounted rate lower than the standard variable rate your bank will default you to. You may find that you need to change to another lender to avail yourself of these discounted rates.
Facility Reviews is another small business finance requirement, and already I am seeing existing business clients of banks undergoing ‘facility reviews'. Many are being told that they have been assessed at a higher risk margin and that their interest rate has been increased. Others are being told that the bank requires more security or a lowering of borrowings within the next 90 days. You need to be prepared for these reviews and argue your case strongly. You may need to seek alternative funding or change your current mix of funding. Make sure you are being well advised.
Also for small business finance, covenants is another area that many business clients have neglected is lending covenants – these are things like your interest coverage ratio, debt ratio, net profit ratio etc that are found in your finance documents. These covenants are not given a lot of emphasis by clients at the time of securing finance facilities and have not been looked at closely by business bankers during the past few years. These covenants have now become very important and banks are strictly enforcing them. If you breach a covenant it could be grounds for calling in all your facilities. Again, review them, stress test them with different business scenarios and get some good advice on them.
Investors is very important for the success of small business finance, many investors that purchased residential or commercial investment properties in the last 3 or 4 years took advantage of fixing the interest rate on all or part of their borrowings. Many of these fixed rates will be expiring this year. You will find that most banks will default the interest rate to the standard full variable rate. This may be some 2%-3% higher than the generous fixed rates you secured some years ago. Just be aware that if you have significant personal borrowings, you may be able to negotiate a discounted rate lower than the standard variable rate your bank will default you to. You may find that you need to change to another lender to avail yourself of these discounted rates.
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