/ 27 November 2009

Credit lines set to reopen

With the downturn in the global and South African economies , the pressure on small and medium businesses to survive has been intense.

Part of the challenge that SMMEs face is not only survival — they have also found it intensely difficult to fund the purchase of assets. As easy as credit was to access before the downturn, it has become
difficult to acquire during the recession. This is changing however.

Keith Watson, director of strategy and business support for vehicle and asset finance at Standard Bank, comments that six months ago banks were extremely hesitant to finance assets for small companies because the risk posed by these transactions was considered too high.

‘The increased risk was a result of the slowdown in the economy as a whole, cutbacks at large companies — many of which are the customers of small companies — and high interest rates. All of these contributed to a situation where smaller companies were seeing decreased revenues and increased costs, putting many of them at risk,” he says.

‘We were seeing a lot of companies that had finance deals with us defaulting on those agreements, as well as the number of insolvencies and liquidations increasing.

At the same time it was more difficult for us to borrow money on the international market, which in turn restricts the amount of money that we have to lend to clients,” he says.

The bank also saw that the number of applications for finance was smaller than before as companies decided that the time was not right to look at acquiring new assets, Watson says.

Many of these risk factors, specifically the high interest rates, have eased and banks are now looking to ramp up the amount of asset and vehicle finance they grant.

Moving into 2010, Watson expects the scale of asset finance deals to start to recover.

‘The truth is that almost every small business needs to take on some kind of debt to finance growth. This debt could be used to finance vehicles or plant and equipment, depending on the industry concerned,” he says.

Although the demand for vehicle finance comes from across industries, the demand for financing plant and equipment from the agriculture and manufacturing sectors is the most pressing.

Companies looking to finance assets need to ensure they have the right information at hand in order to fulfil the banks’ requirements, says Watson.

‘Having a relationship with the bank is a key area that will result in a successful application.”

In addition, if you are able to provide proper financial records, it is easier for the bank to assess the risk it is taking.

For companies that are looking to finance manufacturing equipment, there needs to be a clear understanding of how the equipment in question will be able to deliver revenue to the business. This includes ascertaining what the cost of each is likely to be.

The good news for SMMEs looking to invest in additional capacity to take advantage of both the demand created by the 2010 World Cup and the potential upturn in the local and international economies is that there is considerably more liquidity in the market today than there was just six months ago.

For companies, this means that when they approach their banks the likelihood of an application being approved is significantly higher. But the basic rules of applying for any kind of financing still apply.

In particular, ensure that the business plan is in place to take advantage of the new assets and go to the bank armed with as much information as possible.

Strategies for closing the deal

  • When you approach the bank for financial assistance, go armed with all the documentation you need. Take as much information about your business as you have, including income statements, balance sheets and cash flow statements. Discuss the issue with the bank to show that you have a clear strategy for the business.
  • Show the financial institution that you have the management capacity to carry the business forward. A company’s success rests on the skill of its leaders. A management team that does not have a clear understanding of the issues facing the business will not have the leadership skills to be able to deliver the results.
  • Show the bank that you have a keen understanding of the industry that you operate in. Ensure that you know where all the pitfalls lie, who the competitors are and where the opportunities lie. Understanding where the potential for failure is a key weapon in avoiding it.
  • Know what you want to buy. Provide not just a vague description of the product but exactly what you are looking to acquire. Show the bank that you have done your research, that you know how the desired equipment compares to its competitors and why this particular system has been selected. Banks also like to know whether the equipment in question has some resale value should your venture not work out. In this respect the quality of the asset is of vital importance. Buying the cheapest possible option may not make it easier to get finance as it may have a reduced resale value and therefore make it harder for the bank to resell it later. Failure may not be something you want to think about when you are looking to expand your business but your bank has to build this possibility into its calculations.
  • Use the expertise in your bank. Many of the local banks have experts who spend all day thinking about your industry. They have intimate knowledge of specific industries and can provide invaluable assistance when deciding how focus the business. SMMEs can’t afford to employ expensive consultants to give them advice but the banks are often willing to give this out for free in order to keep you loyal and seal the deal