Access to Finance
Access to Finance
Lending support for North West businesses to grow
The views expressed by the author do not necessarily reflect the views of the Barclays Bank PLC Group nor should they be taken as statements of policy or intent of the Barclays Bank PLC Group. The Barclays Bank PLC Group takes no responsibility for the veracity of information contained in third party articles and no warranties or undertakings of any kind whether express or implied, regarding the accuracy or completeness of the information is given. The Barclays Bank PLC Group takes no liability for the impact of any decisions made based on information contained and views expressed in this article. Barclays is a trading name of Barclays Bank PLC and is registered in England and authorised and regulated by the Financial Services Authority (FSA No.122702). Registered number is 1026167 and its registered office is 1 Churchill Place, London, E14 5HP.
Access to Finance Welcome to our guide to accessing finance in association with Barclays. As the region's leading business news website, TheBusinessDesk.com regularly reports on the institutions lending to North West businesses Chris Barry - editor and how those TheBusinessDesk.com businesses are investing the valuable streams of finance. This supplement is an opportunity to get behind the headlines and examine in depth the issues, but also the opportunities, of accessing finance and doing deals in what remains a difficult economic environment. As we all recognise, there's been a disconnect between what the banking sector in particular is saying about access to finance and what companies are saying, with businesses often critical of the finance streams open to them. Communication is undoubtedly key in ensuring this gap is closed and this disconnect is bridged. It's this culture that Barclays has embraced, as well as being open to discuss and debate the issue of access to finance - a subject that many other lenders might not be as open to face. Our round table discussion and in-depth articles in this supplement show how close Barclays is to businesses at all levels and demonstrates how the bank is willing to tackle the issues that are being highlighted. If the country is going to move forward into positive growth this is the only way we can achieve those goals. I hope you find it useful.
Chris Barry editor, TheBusinessDesk.com
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TheBusinessDesk.com North West - Access to Finance - Feb 2012
Contents Foreword: Chris Barry, editor, TheBusinessDesk.com ............................P2 Foreword: Michael Hartig, director, Corporate Banking, Barclays ...................P3 The landscape for lending ....................P4-6 Choosing the right type of finance for your business...................................P7-9 Trade finance .........................................P10 What a financier is looking for...........P12-14 Round table discussion.....................P15-17
TheBusinessDesk.com Portland Tower, 53 Portland Street, Manchester M1 3LF editor: Chris Barry e: [email protected] publication editor: Joanne Birtwistle e:[email protected]
business development manager: Phil Birkhead e: [email protected] t: 0161 238 4922 f: 0161 238 4905
A question of confidence? Like much of the UK economic landscape, the North West region has gone through a degree of challenge and change in recent times. As the region picks itself up and starts to rebuild, a fundamental contradiction now exists in the Michael Hartig debate around business director, Corporate lending: risky lending practices Banking, Barclays are recognised as a key cause of the credit crunch, but widespread calls abound for banks to relax their credit criteria and lend more to businesses to jump start the economic recovery. Much of the insistence on increased lending comes from genuine concern among politicians and business groups and through business surveys that reveal a significant proportion of companies remain concerned about their ability to obtain bank lending if required. At the same time, there is a general agreement that pre-credit crunch lending became too relaxed, with credit conditions lowered to the point of irresponsibility by some lenders to get more business through the door. As the economy quickly deteriorated in 2008, these credit decisions soon became write-offs, eventually creating another destabilising element to the entire financial system. Barclays is committed to finding the right balance between these competing ideals. A key question in deciding where the balance in lending lies is who should determine the right level of lending in the economy. Is it banks, business groups or politicians? The view from Barclays is ‘none of the above’; it is businesses themselves who must make the right borrowing decisions for their organisations. Yes, the banking sector has a crucial role to play, providing a range of funding for investment and expansion. However, one of the main constraining factors across the region is demand. Just as most individuals would not look to borrow their way out of difficulty, a huge number of our clients are adopting the same position. Despite the ‘banks are not lending’ rhetoric, the reality is that demand for lending is down significantly as companies deleverage, seeking to strengthen and restructure themselves to tackle the vastly different economic landscape that we all face today.
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Barclays takes its responsibility to lend extremely seriously. We have remained open for business throughout the recession – by way of illustration, in 2011, Barclays advanced £43.6bn in gross new term lending to businesses in the UK, including £14.7bn to SMEs, and is always seeking further opportunities to lend to viable business propositions. Furthermore, Barclays’ approval rates for credit applications from businesses have remained consistent with their high pre-recession levels.
‘A key question in deciding where the balance in lending lies, is who should determine the right level of lending in the economy.’ While the regional economy may be struggling to take off at present, there are examples of well-managed, well-funded companies with the right strategy that are achieving significant growth. They are gaining market share by moving into new markets, or in some cases growth through a well-executed strategic acquisition. That will only happen if businesses are prepared to invest. There is only so long a business can defer investment, whether it is in jobs, new premises or exploring new markets. If uncertainty is the new normal, companies need to have greater confidence in their own ability to grow proactively. There are many success stories among our client base, with a common element being those organisations that have looked past external economic conditions and outperformed competitors to gain market share and break into new markets. Indeed, increased confidence and therefore investment feeds into a positive cycle in which growth is an inevitable output. Banks have a key role to play in supporting this cycle. So the answer to the question of lending, at least at Barclays, is straightforward. We lend responsibly; we price according to risk; and we are open for business at a time that offers real opportunities for many viable businesses to acquire, expand or invest. We’re ready and able to provide the right support to those preparing to take this journey.
The landscape for lending Getting businesses borrowing and back to growth. THE financial crisis has resulted in a new landscape for financiers and businesses seeking funding alike. The rules have changed and although lenders have become more pragmatic that does not mean funding isn't available. Events of the last few years and ongoing uncertainty within the eurozone and wider financial markets have left many businesses reluctant to borrow. Damian Waters, North West director of the CBI, says things remain understandably tough and that most businesses are of the opinion that 2011 saw the bottom and that they are on the way back up, albeit slowly. “Previous recessions have had a sharper bounce back. This will be a long slow recovery,” he said. Indeed, lenders now have the task of encouraging businesses through their doors to get them to start borrowing again. Phil McCabe, senior policy adviser at the Forum for Private Business, points to recent Project Phil McCabe - senior Merlin figures policy adviser, Forum for which show Private Business that, collectively, the banks fell short of hitting their business lending targets. He added: “However, there are signs of progress. Perhaps driven by the emergence of competing
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banks – not to mention alternative funding solutions such as crowd sourced funding in addition to incentives for equity investors – banks are actively saying they want to lend to small businesses, but argue that demand is down.”
‘Previous recessions have had a sharper bounce back. This will be a long slow recovery.’ Michael Hartig, director of Corporate Banking at Barclays, argues that against a backdrop of reduced lending it is taking market share. He said: “Barclays has seen its lending grow and has taken market share from the competition. Term lending has grown to £43.6bn in 2011, with £14.7bn of that being gross new lending to the SME sector.” While many companies have recovered since the dark days of 2008, the economic crisis continues
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to challenge businesses. Some are still uncertain and have retained the defensive formation Michael Hartig - director, Corporate Banking, they adopted Barclays when their survival instincts first kicked in. Hartig said: “Our desire to provide corporates with working capital and investment has not changed over the cycle. But corporates at the top end have been deleveraging: paying down debt and/or going to the bond or equity market to give themselves cash. “Because they are deleveraging, businesses are not making big strategic investments. They are perhaps holding off acquiring a target business and waiting to see how the market pans out.” Businesses putting projections together still feel they have no certainty that those growth plans will come about.
Jason Hiley, partner at accountancy firm PKF in Manchester, added: “Corporate acquirers Jason Hiley may have partner, PKF strong balance sheets and cash reserves, but may hesitate to conclude transactions because of concerns about getting the timing wrong or because they may need to preserve cash for potential hard times ahead.” That continued uncertainty has meant that banks and their clients are taking a more in-depth view of their affairs.
How North West businesses see the UK as a place to do business in 10 years time 10% 23% Much better Somewhat better 25%
Somewhat worse Much worse
17%
Don't know 15%
10%
How North West businesses see the region as a place to do business in 10 years time 4% 2% 9%
Hartig said: “Post 2008/09 the bank has made a big shift in its approach – with a renewed focus on spending more time with clients and reassuring them that we understand their issues.
23% Much better Somewhat better The same Somewhat worse
30%
‘Banks and their clients are taking a more in-depth view of their affairs.’ “Our relationship directors are looking after smaller numbers of clients and spend more time with each client.” He added that those businesses that have survived what he called “the most challenging times in recent memory” understand the need to be on top of their numbers and report that – and the benefit of being in touch with their banks. “Those trading have taken tough action and made tough choices – the companies that are left have been doing it right,” he said. However, there is now less loyalty between a business and a lender
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The same
Much worse Don't know
32%
What North West businesses predict the predominant economic pattern will be in the UK in 10 years time 13%
1% Steady and sustained growth No growth
5% 47% 14%
Negative growth Boom and bust Modest or minor growth Don't know
20% Source: Barclays 2012: How businesses see the future. Published August 2011
than there was previously, according to Nick Kindon, managing director for Bibby Financial Services North West.
of view, providing a high-quality and
He said: “From the lenders’ point
customers.
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professional service is more important than ever in overcoming this challenge and retaining
borrow for a long-term investment. McCabe says business owners are also waking up to the benefits of alternative forms of funding. “From invoice finance to newer, more innovative platforms such as Funding Circle and Funding Store, it is clearly advisable to shop around in the realisation that a business is likely to require a range of types of finance – perhaps including equity investment,” he said.
“With relationships mostly based on a transactional basis, businesses’ decisions are Nick Kindon - managing director, Bibby Financial also less Services North West price-driven than in the past, with simple availability of credit being the driving force as to what firms choose.”
He added: “Equally, in a new era of finance, business owners should realise that businesses able to produce and present clear financial accounts and business plans will be more likely to get the funding they need at the rates they want.”
‘BASEL III banking regulations mean that for every pound banks lend they now have to hold more.’
Hartig said: “Across the industry there has been a recalibration of terms because that’s what has been asked for by the government, and by shareholders.
Businesses need to get smarter about the way they approach accessing finance, just as financiers have had to look again at their approach to lending, in the wake of the crisis. In the past, bankers have been guilty of putting too much debt into a business. McCabe suggests that financiers need to broaden their lending criteria and move away from centralised decision making, if they are to win back business confidence.
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Although there have not been radical changes to the types of finance available in the market since 2008, the recurring terms being used to describe lending codes today are “prudent” and “sensible”.
“Cash is there – the cost has never been lower and by and large the terms haven’t changed but where they have there has been a recalculation to more sensible levels.” What has changed is that banks have had to keep more capital – the introduction of BASEL III banking regulations means that for every pound banks lend they now have to hold more. But at 0.5% bank rates are at an historic all time low and most are saying it is unlikely they will rise in the next year. It's a great time to
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‘Business owners are waking up to the benefits of alternative forms of funding.’ Waters agreed: “Businesses are looking at their options more and have taken the opportunity to consider different alternatives although the vast majority are still financing in the traditional manor.” Kindon said: “The type of finance preferred by customers has largely been driven by availability of late, although financial intermediaries and business owners alike are becoming more aware of the different funding options available. “This is helping to grow awareness among the North West's business community of the range of finance options out there, including invoice finance.” Hartig concluded: “There are opportunities, such as for businesses to buy another business, but it is twofold – there is also uncertainty. “So if, for example, a customer finds their payment terms have been changed from 60 to 90 days, if they come and flag it up early, we can help.”
Choosing the right type of finance for your business Knowing which financial product is best suited to your company’s needs will not only help your application be approved, it could also keep the costs of borrowing down. Choosing the right type of business funding is all about planning and preparation. A company director must have a good understanding of exactly what the funds will be used for to know what the best type of business finance is to achieve this. But a company director should not just think about how the debt is structured – but the structure of the whole deal and sometimes even the structure of the company itself. Michael Hartig, director of Corporate Banking at Barclays, said: “A business has to think about what the right type of capital structure is – the ideal split between debt and equity.” Phil Mcabe, senior policy adviser at the Forum for Private Business, added: “While debt finance is the most valued type of funding among entrepreneurs, partly because they do not have to sacrifice a stake in their businesses, equity investment should not be ruled out as an option. “In addition to upfront funding to take a firm to the next level, on offer can be important advice, guidance and information – particularly from angel investors.” Funding from debt and private equity providers is available for strong performing businesses with a well developed strategy. However, the current climate means there is a competitive private equity market, but a more limited number of debt funders willing to put funds into transactions, particularly in the SME space. For larger businesses with a good track record of profit there is appetite from debt funders, according to Jason Hiley, corporate finance
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partner at PKF in Manchester.
Street in Manchester.
Hiley added: “Below this level, some funders are still very active, particularly if businesses are in
He is seeing a more collaborative approach between debt and equity providers to fund buy-in management buyouts (BIMBOs) and management buyouts (MBOs).
‘The new North West Funds are helping to unlock both debt and equity funding.’ certain target sectors. The new North West Funds are also helping to unlock both debt and equity funding for companies, which is a positive move in a challenging marketplace.” As far as corporate acquisitions are concerned, there are examples in the market of the banks being prepared to compete for the best opportunities; particularly if it is a sector they are interested in, such as healthcare, according to Tony Harper, partner and head of corporate for Brabners Chaffe
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He said: “Naturally as this process starts it will be Tony Harper - head of the most corporate, Brabners compelling Chaffe St, Manchester and attractive opportunities that will secure support. Banks and private equity houses are now talking much more positively about improved conditions and opportunities but measured against the size and volume of transactions completed in the recent past there is still a way to go.” When it comes to debt, as a general principle, the type of the loan being applied for should match the type of asset being financed.
For example, the purchase of premises is a long-term financing obligation with the ability to offer the property as security and this should command the support of a fixed-term loan over a relatively long period. But the introduction of BASEL III banking regulations, which strengthened bank capital requirements and introduced regulatory requirements on bank liquidity and bank leverage, has meant that banks are having to find new ways to approach
mortgage products, to keep the cost of lending down. Typically, of the more traditional forms, overdrafts are valued most for day-to-day business expenses and loans used for growth, innovation and diversification. But BASEL III rules also mean that even if a business doesn’t use its overdraft, that overdraft will still have a capital cost to the bank. And although an overdraft still has its place, there has been a general move away from this to more structured types of funding.
Harper said: “Increasingly these days the banks and other asset based lenders focus on lending against the security of book debts or other assets.” Invoice finance can be used to fund working capital and Barclays has seen a growth in the popularity of this product, particularly confidential invoice discounting. Jeremy Smith, sales finance at Barclays, said: “Invoice finance and asset based lending has traditionally been recessionary proof and once again despite the difficult general
Business Growth Fund The £2.5bn Business Growth Fund (BGF) has been set up to help fast growing smaller and medium sized businesses, by making long-term equity investments to fund a wide variety of requirements from increasing working capital to making a strategic acquisition to launching an export drive or developing new products. The fund is supported by five UK banks and invests between £2m and £10m in return for a minority equity stake. It was set up to target a part of the market that is perceived as not being so well catered for in terms of equity investment. Michael Hartig, director of Corporate Banking at Barclays, said: “I think it will be a catalyst and will help improve wider confidence in the deals market. It has a different approach and its mandate is different to what has been done before. It is fulfilling a niche.” David Colclough is the newly appointed investment director for the fund in the North. He has joined regional director Andy Gregory at the Manchester office, which opened in September.
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Colcough was formerly a director with 3i with responsibility for the Manchester office and has over thirteen years’ experience of investing in SMEs across the northern region. Colcough said: “There is an opportunity for BGF to grow that part of the market. We are deliberately taking a long-term view to the investments we make. This is unlike traditional private equity with a fixed exit plan. We are more long-term and don’t incentivise that exit.
‘We are keen to put our capital to work.’ “We are not there to buy businesses but to take a 10% to 40% equity stake to help facilitate growth in the business.” He added that the fund was looking at a strong pipeline of deals and that 90% of the deals the fund is looking at are not in competition with private equity houses. “So we must be growing the market if we are not in competition,” he said. Andy Gregory, BGF regional director for the North of England,
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added: “We are seeing a strong pipeline of opportunities across the region and are keen David Colclough - investment director, to put our Business Growth Fund capital to work so that businesses in this region have access to the finance they need to grow. “We urge business owners… to act on their growth ambitions and consider how best they can be financed for the future. At BGF we believe that equity has always been one of the most effective ways to fund a growing business and as equity investors, with interests aligned with those of business owners, we will work hard to further the growth potential of our investee companies.”
economic conditions, lending levels have held up well across the industry. Lending decisions are based more on the strength of the underlying assets, with less emphasis on the financial performance of the business. “It is particularly pleasing to see ABL being increasingly used in the financing of larger corporate transactions and the continued development of an active ABL syndications market.”
‘Many firms are turning to invoice finance because of the flexibility it offers.’ Nick Kindon, managing director for Bibby Financial Services North West, said many firms are increasingly turning to invoice finance, particularly in this climate, because of the flexibility it offers. He added: “The funding grows inline with the businesses sales growth, helping owners to cope with the peaks and troughs most firms experience without having to renegotiate a long-term financial arrangement.” For businesses struggling to manage day-to-day cash flows, trade finance is increasingly being used as an alternative way for businesses to get cash up front. Most people think trade based finance means trading overseas but it doesn’t have to be cross border. For example, if you are a manufacturer with a big order from a major Plc the bank would look at instruments like a bill of exchange, where the Plc promises to pay at agreed date in the future. It can help with cash management – a business can manage its cash flow by collecting debt faster and paying slower.
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The Hut Group - acquiring to bolster organic growth ACQUISITIONS and surging international business have sent online retailer The Hut Group’s sales up 70% to a record £143m in the year to the end of December 2011. The Northwich-based group’s websites, which include zavvi.com, lookfantastic.com and mylabel.co.uk, had received 78 million visits last year. Around 92% of sales came from its own sites, with the balance coming from major retailers it supplies. Demonstrating the group’s appeal beyond these shores, 35% of total revenues came from international sales - with zavvi well established in Spain and the Netherlands. Chief executive Matt Moulding said: “Our focus on delivering best in class value and service to our UK and international consumers has enabled the group to gain market share, particularly in the final quarter.
‘We always communicate with the bank when we are thinking of an acquisition.’ “Our business model positions us well against the backdrop of a challenging High Street retail environment and the continuing sales channel shift towards online retail the group is very well placed to continue its high growth. “Our focus for 2012 is on driving strong organic growth by further improving our service to our customers, continuing to expand our product range and increasing our international sales.” Steven Whitehead, commercial director for The Hut Group, said that although the company is fortunate to have an online business model that is proving resilient in a tough climate, it still requires a huge amount of investment. He said: “In terms of technology cost it is akin to how offline retailers invest in the fixed cost of their stores. People think the costs of setting up
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Matt Moulding - chief executive, The Hut Group
online are lower but to do it properly you have to invest. “To do that we need equity support and debt. We have had four funding rounds in the last year and support from Barclays.” In May last year, The Hut paid £58m for Manchester-based MyProtein.com, the sports nutrition brand, and the acquisition contributed £16m in the seven months after the deal. Barclays provided an overdraft and acquisition term loan for Myprotein, as well as some debt financing. Richard Faulkner and Oliver Reece at Barclays arranged the finance for the deal. Whitehead said: “We always communicate with the bank when we are thinking of an acquisition or a capital expenditure within the business. They have a good open door policy and are very collaborative – it means you can suggest things without being afraid.” Whitehead said although The Hut is looking for acquisition opportunities, organic growth remains crucial to the company’s success. He said: “We must have a strong investment offering and still need to show strong organic growth but that can be augmented by a strategic acquisition in categories we are in but also additional categories. “We will continue to look at selective acquisitions, not just in sectors but also territories – both organically and overseas. “We fund organic growth through our existing profits and cash flow in the business and we raise equity and debt for more transformational deals.” The group, which is chaired by Angus Monro, now employs around 550 people.
Trade finance The fragile state of the UK and European economies means that developing opportunities to export products in new markets should be more of a priority than ever for North West businesses. Add the current weak pound to the equation and it could be a real opportunity to start trading overseas. The current uncertainties within Europe – one of the UK's largest export markets – mean that while it may have been the obvious choice for exporting in the past, businesses should now take the opportunity to look further afield to faster growing markets, where the rewards could be much greater. Stephen Edwards, director, trade finance at Barclays, said: “There has been a quietening down in Europe Stephen Edwards which was - director, trade finance, Barclays seen as an easy export market - but there is recognition that although it is an easy market to trade with, competition is harder. “The vast majority [of trade] does go to the EU but clients recognise that they need to go where the money and growth is. Africa, the Middle East and India are all seeing increased interest.” The so-called high growth BRIC countries – Brazil, Russia, India and China – offer huge potential gains. The BRIC economies will account for 40% of world GDP growth during 2011 and 2012, up from just 17% in 2010. Phil Mcabe of the Forum for Private Business said funding for export development is one of the main barriers its members face to accessing overseas markets.
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“The government is seeking to address this via UK Export Finance, its export credit agency, and of course the Export Credit Guarantee,” he said. But in recognition of the opportunities for UK businesses to grow from overseas trade, it is now seen as one of the biggest growth areas for Barclays and the bank has plans to double that growth over the next five years. The bank is keen to encourage its clients to look to overseas opportunities and is working closely with organisations like UKTI to give signposting, advice and support to clients.
‘Clients recognise that they need to go where the money and growth is.’ Edwards said: “I do get brought in by a relationship director if there is a good UK based business that hasn’t thought about exports before, to discuss it and help them. If we see a company that is ripe for exporting we will try and encourage that. We don’t just handle financial transactions, we try to add value to the relationship as well.” Export finance is one of the strongest areas of growth within the asset based lending industry. According to the latest figures from Asset Based Finance Association (Q3 2011) uptake of export finance has increased by 38% compared with last year, helping fuel an increase in the number of UK exporters. Nick Kindon, managing director for Bibby Financial Services North West, said: “Businesses with ambitions to break into overseas markets would do well to look at specialist forms of funding, such as export factoring, which are designed specifically to aid businesses trading overseas.”
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Businesses that are starting to export, or are moving into new territories, need to ensure they have the right financial tools for the job. Not just to trade with businesses overseas but also to protect themselves and ensure they get paid. Edwards said: “There has been a return to traditional trade instruments, such as letters of credit and bills of exchange. But there are also variants of that because credit insurance has become less available. “Things like a stand by letter of credit are being used more in Western Europe or even UK to UK transactions. That sits in the background and only if there is a default of payment is a claim made. It’s less burdensome and more flexible.” If a business does get involved in an export transaction, Edwards’ main piece of advice is to talk to the bank early on. “Don’t take it for granted that existing structures are a) suitable and b) available for that transaction – sometimes we can fund something in a much better way. Trade finance uses basic instruments but it is more about how we package those together for a trade finance solution that is the most appropriate way to fund the business.”
What a financier is looking for - stating your case TheBusinessDesk.com has asked North West financiers and advisers for their top five tips on what they look for in a lending application. A focused management team
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A financier will want to know about all the key people in management, what experience they have and what they have done previously. Michael Hartig, director at Barclays, said: “Before anything else it’s the management team. We will look at what the client has done to demonstrate that strength.”
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Up-to-date financials
A key thing banks and financiers will be looking for the business to demonstrate is that it can repay the loan and that the debt is serviceable.
‘A financier will want to know about all the key people in management, what experience they have and what they have done previously.’ Banks will want to see details of current financial performance and an understanding of what influenced an increase/decrease in revenue either way. Hartig said: “There should be a focus on cash generation. Where is it for the business? That’s where the bank will look for its source of repayment. It’s about cash flow and cash generation.”
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A well thought out business plan They will also want to know the background to the business: including its structure; what it does; where it’s coming from; and where it is now. On top of setting out how much the business is looking for and what the money will be Michael Hartig - director, used for, Corporate Banking, a more Barclays expansive outline of what the business is trying to achieve, the business’ own anticipated contribution and its long-term goals will help to put this information in context. Tony Harper, partner and head of corporate for Brabners Chaffe
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‘Banks and financiers will be looking for the business to demonstrate that it can repay the loan.’ Street in Manchester, said: “Any investment decision at the moment is more difficult to obtain and success depends upon a well thought out, structured and convincing written proposal with supporting data.” Jason Hiley, corporate finance partner at PKF in Manchester, says getting these basics right is essential. He said: “[That’s] a convincing team with a clear vision distilled into a thought-through business plan, with well prepared financial projections.”
The role of advisers When hammering out a funding deal, the use of good advisers will pay dividends as it should maximise the chance of success and help ensure the most competitive terms.
Jason Hiley partner, PKF
Advisers will help to ensure any business plan is well written, considering downside risk as well as upside potential.
Jason Hiley, corporate finance partner at PKF in Manchester, said: “A good adviser will present the business proposal in the right way, and pitch it to funders who are interested in that type of lend. This should streamline the process and increase the chances of success on the best terms.” Professional advisers see a lot of deals going through and are
Realistic business forecasting
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As well as outlining a company’s recent business performance, a plan should also include forecasts. This does not have to be set in stone, but neither should a business produce a forecast purely for the benefit of the bank.
‘Dialogue between the client and the bank is crucial. No-one likes surprises on both sides.’
therefore well placed to advise on whether or not the terms offered are competitive.
‘Advisers will help to ensure any business plan is well written, considering downside risk as well as potential.’ Tony Harper, partner and head of corporate for Brabners Chaffe Street in Manchester, said: “One cannot underestimate the benefits which derive from the funding proposal having been subjected to the scrutiny of professional advisers.” Professional advisers can also help to identify which sources of finance are most appropriate to the business’ need. Harper added: “[They] can be invaluable in identifying which institutions have a particular appetite for that type of finance at any one time.”
Richard Harding, partner at Ernst & Young in Manchester, said: “Those that can Richard Harding partner, Ernst & Young assess and Manchester benchmark their business against peers and market, revise their business plans in a credible and robust way, identify risks and uncertainties and build those into contingency plans based on different scenarios will be most successful.” Hartig added: “We look at whether
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He added that banks are impressed both by the fact that a business has taken professional advice and that the proposal has the support and endorsement of a professional firm. Michael Hartig, director at Barclays, agrees that including advisers in the process, when hammering out a deal is worthwhile. Hartig said: “Don’t be embarrassed to get the best adviser team around you. Some businesses think about the cost and think they can do it all themselves but that cost pays dividends so you should get the best possible deals team.”
they have contemplated downside scenarios.”
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Open communication
Banks are keen to attract and retain new business and as such have invested in their front line to ensure they have the time and resource to assess and understand a client’s business. Two years ago a relationship director at Barclays would have had significantly more clients to manage, whereas now they have fewer clients and more time to spend with them. Hartig said: “A good level of
‘If an initial application is declined ask your bank for feedback to understand why.’ dialogue between the client and the bank is crucial. No-one likes surprises on both sides of the relationship. Transparency and openness means it is easier to tackle problems if there is a bump in the road. “Treat your banking partners as a long-term partner. Don’t just think about the immediate transaction but the longer term.” If an initial application is declined ask your bank for feedback to understand why. Also ask how you could adjust your business model to help secure funding and what elements of your plans may need further consideration - a ‘no’ now may not mean a ‘no’ in the future. Richard Harding, partner at Ernst & Young in Manchester, said: “Successful companies will be those that develop a capital strategy that meets their wider corporate objectives, navigates extremely volatile funding markets and secures financing on competitive terms.”
Chess Telecom - on the acquisition trail cross-selling opportunity to provide our new customers with a suite of products to help improve their business communications.”
CHESS, the privatelyowned independent telecoms company, has made eight acquisitions in the last year, after sealing a £21m funding package with Barclays to support its strategy for growth. The Alderley Edge company offers communications products including mobile, fixed line and calls, broadband, maintenance, VoIP and data. In the year to the end of April 2011, it grew turnover 12% to £32.7m. Its earnings before interest, tax, depreciation and amortisation (ebitda) rose 34% to £7.1m and profits by 31% from £3.5m to £4.6m. Chess most recently bought Lincolnshire firm Directory Business Services in December. DBS Richard Btesh specialises in director of acquisitions, providing Chess Telecom businesses with non-geographic telephone numbers, and Chess has said it will add £1m to annual turnover. DBS, which will bring 2,800 customers and its online ordering system and websites to Chess, will continue to trade as a web services and online marketing company. Richard Btesh, director who leads acquisitions at Chess, said: “This acquisition gives us a great
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TheBusinessDesk.com North West - Access to Finance - Feb 2012
David Clarke, of DBS, added: “Chess have built a reputation as acquisition experts and that title is well deserved. I’ve been hugely impressed by the level of professionalism at every level and at each stage of the acquisition process and am confident our customers will receive an exceptional level of service with Chess.”
‘This acquisition gives us a great cross-selling opportunity to provide our new customers with a suite of products.’ The £21m funding deal was arranged by Barclays in Manchester, led by Richard Faulkner, the bank’s relationship director for technology, media and telecoms. He was assisted by debt finance specialists Glenn Clarke and Oliver Reece. Mr Faulkner said: “Our industry focus and thorough understanding of the telecoms sector has enabled us to structure a finance solution that fits well with Chess’s acquisition strategy.” Richard Btesh added: “The funding received from Barclays demonstrates the success of our strategy of acquiring small to mid-sized telecoms businesses. Barclays demonstrated clear understanding of our sector.” Chess has carried out 48 acquisitions in the last six years and now employs around 150 staff. As well as acquisitions, cross-selling additional services to its 20,000plus customers has been a key driver of Chess’ growth.
Round table discussion The deals market is still adjusting to a new way of doing business.
Attendees: Chairman: Chris Barry - editor, TheBusinessDesk.com Michael Hartig - director, Corporate Banking, Barclays
David Colclough - investment director, Business Growth Fund
Gregg Davison - corporate partner, Pinsent Masons Mike Reeves - managing partner, Clearwater Corporate Finance Ryan Bevington - investment director, Maven Capital Partners
Nigel Birkett - debt advisory partner, Deloitte
Damian Waters - North West director, CBI
Iain Wolstenholme - partner, Gresham Private Equity
Jeremy Smith - director, sales finance, Barclays
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Access to finance - round table attendees
THE region’s deals market is bursting with potential – there are plenty of businesses ripe for the picking, private equity firms with lots of cash to invest and debt is available for the right deal.
Damian Waters, North West director for the CBI, said: “I spend four and a half days a week seeing the chief executives of businesses that are household names. 2011 hit the bottom and 2012 will start to see the long slow road to recovery.
Yet deals themselves are proving hard to complete and when they do get over the line it is often the culmination of a long, slow process.
‘Although many businesses are doing well, confidence is affected by the scaremongering of rolling news.’
So where’s the disconnect? Dealmakers and advisers say it comes down to two things: business confidence, and a need for everyone to adjust their expectations to the post Lehmans world. That was the view largely shared by experts around the table at TheBusinessDesk.com’s round table discussion, held at Barclays’ offices in Spinningfields, Manchester. On confidence, the view was broadly that although many businesses are doing very well, their confidence is affected by the scaremongering of rolling news and its message of doom and gloom.
TheBusinessDesk.com North West - Access to Finance - Feb 2012
“We are in a difficult period. It’s a bit like running a marathon – it’s great that you got half way but then you realise you have still got another 13 miles to go. Our worry is that growth has become a political issue.” Michael Hartig, director, Corporate Banking for Barclays, agreed that constant bad news flow is bashing business confidence. He said: “Lots of businesses are doing well but they turn on the TV
they are not reported so much so people feel better. We have got to get on with business and try to build confidence.”
All agreed their approach to accessing finance had changed and that fundability was still an issue.
The CBI’s Waters said the membership organisation’s Washington office was incredulous at events unfolding over in the UK.
‘If we look to India and China - that’s where interest and inward investment will come from.’
“They wonder what’s going on in the UK and ask why we are so anti business,” he said.
David Colclough - investment director, Business Growth Fund
and think ‘we must be the outrider’. We need more of these companies to say how well they are doing. The pipeline on the face of it is starting to build but sentiment is not helping matters.”
‘Uncertainty surrounding developments in the eurozone has impacted confidence.’ The Business Growth Fund was set up to fill that equity gap of £2m to £10m and give businesses funding options they have not had until now. David Colclough, newly appointed investment director for the North at the Business Growth Fund (see box p8), said: “Most of the businesses I have met are hugely optimistic and are turning a blind eye to the media. Often they are constrained by access to finance and what those options are.” However, uncertainty surrounding developments in the eurozone has also legitimately impacted confidence. Hartig said: “Pre-Christmas it was constantly in ther news and while the issues have not been resolved,
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Iain Wolstenholme, partner at Gresham Private Equity, agreed. He said: “Large US trade buyers and investors are seeing what’s going on in the eurozone and wondering ‘why would we open new factories, or make acquisitions’, especially as their own [US] economy is moving into growth.” He added that although we in Europe think there is a global recession, figures actually show that most countries around the world are still demonstrating decent growth rates. Mike Reeves, managing partner at Clearwater Corporate Finance, and Ryan Bevington, investment director at Maven Capital Partners both picked up on this point – adding that they had been involved in a lot more cross border deals with overseas acquirers over the last five years.
Bevington said: “That whole dynamic has changed now. A lot of deals now will try and find an alternative solution, rather than going to the bank, we are funding more ourselves. I think it’s harder at the smaller end of the scale, looking for £5/6m of debt. What was the equity gap is now the debt gap.” Those businesses with strong growth and little debt have reason to be optimistic but for those with debt that are highly geared, there is a big difference. Nigel Birkett, debt advisory partner at Deloitte, said: “For a larger business with a fair amount of debt, access to finance is important. A lot of businesses have the wrong capital structure. They got a lot of debt three or four years ago and
“The US is quite insular but if we look to India and China – that’s where interest and inward investment will come from. Over the next few years we will see more China businesses making a move for businesses over here,” said Reeves. Gregg Davison, corporate partner at Pinsent Masons, added: “The entrepreneurial spirit is quite alive with overseas buyers. With them, deals can be quickly done whereas UK buyers lack that confidence. North West deals are going to be with overseas acquisitions because they have that confidence.”
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Gregg Davison - corporate partner, Pinsent Masons
longer and longer. That’s to do with confidence in the market.” Hartig at Barclays said: “There is lending capacity out there for the right business… corporates have deleveraged and are keeping the cash.”
‘More private equity firms are looking to add value by investing in the business and the people.’ now they have to refinance that. The problem is that these businesses are not going to grow or improve so they have to be addressed.” Wolstenholme said education is still needed on what private equity can do, particularly in the lower and mid market.
More private equity firms are looking to add value by investing in the business and people, then refinancing later on.
“People see Dragons’ Den and think that’s private equity but then they also see the Southern Cross debacle,” he said.
Colclough made the point that private equity could help to get good businesses into better shape but added that less debt was available for such deals, so private equity firms are being forced to accept lower returns.
“We have always fairly conservatively leveraged our portfolio companies and focussed more on earnings growth rather than maximising our returns by putting the most amount of debt into a structure.”
Bevington said: “There has been a return to the old style - investing in the lower to mid market and trying to improve businesses rather than not doing anything and flipping it onto the next private equity house.”
‘People see Dragons’ Den and think that's private equity.’ Davison said that private equity gets a bad press for being shorttermist, with the view that a private equity house is looking for an exit almost as soon as it has struck a deal. But, he said, it is much more long-term and strategic than listing on the stock market, where businesses can “become obsessed” with the share price.
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“That leads to short-termism,” he said.
Jeremy Smith, director, sales finance at Barclays, added: “From an asset based lending perspective our industry has traditionally been regarded a recessionary proof industry. The lending decisions are made with a bias towards the strength of the underlying assets and less so on the financial performance of the business. “That said, our industry statistics suggest that whilst overall lending values have remained steady, there has been a significant fall in client numbers in the SME space, particularly in the sub £5m turnover space, although there is still a competitive market out there that wants to lend.”
Hartig added: “If you have delivered on the first six months of the business plan and improved things it makes the business eminently more bankable, and it will get a better deal. It provides certainty to the vendor as well.” Bevington added: “It de-risks it as well. Many deal transactions are post event deals. You can de-risk six to 12 months down the line. That’s a trend we’ll see continue.” Davison said: “When we get instructed we hope the debt issue to support the transaction has been resolved but we find they take
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Iain Wolstenholme - partner, Gresham Private Equity
Lending support for North West businesses to grow
The views expressed by the author do not necessarily reflect the views of the Barclays Bank PLC Group nor should they be taken as statements of policy or intent of the Barclays Bank PLC Group. The Barclays Bank PLC Group takes no responsibility for the veracity of information contained in third party articles and no warranties or undertakings of any kind whether express or implied, regarding the accuracy or completeness of the information is given. The Barclays Bank PLC Group takes no liability for the impact of any decisions made based on information contained and views expressed in this article. Barclays is a trading name of Barclays Bank PLC and is registered in England and authorised and regulated by the Financial Services Authority (FSA No.122702). Registered number is 1026167 and its registered office is 1 Churchill Place, London, E14 5HP.
Access to Finance Welcome to our guide to accessing finance in association with Barclays. As the region's leading business news website, TheBusinessDesk.com regularly reports on the institutions lending to North West businesses Chris Barry - editor and how those TheBusinessDesk.com businesses are investing the valuable streams of finance. This supplement is an opportunity to get behind the headlines and examine in depth the issues, but also the opportunities, of accessing finance and doing deals in what remains a difficult economic environment. As we all recognise, there's been a disconnect between what the banking sector in particular is saying about access to finance and what companies are saying, with businesses often critical of the finance streams open to them. Communication is undoubtedly key in ensuring this gap is closed and this disconnect is bridged. It's this culture that Barclays has embraced, as well as being open to discuss and debate the issue of access to finance - a subject that many other lenders might not be as open to face. Our round table discussion and in-depth articles in this supplement show how close Barclays is to businesses at all levels and demonstrates how the bank is willing to tackle the issues that are being highlighted. If the country is going to move forward into positive growth this is the only way we can achieve those goals. I hope you find it useful.
Chris Barry editor, TheBusinessDesk.com
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TheBusinessDesk.com North West - Access to Finance - Feb 2012
Contents Foreword: Chris Barry, editor, TheBusinessDesk.com ............................P2 Foreword: Michael Hartig, director, Corporate Banking, Barclays ...................P3 The landscape for lending ....................P4-6 Choosing the right type of finance for your business...................................P7-9 Trade finance .........................................P10 What a financier is looking for...........P12-14 Round table discussion.....................P15-17
TheBusinessDesk.com Portland Tower, 53 Portland Street, Manchester M1 3LF editor: Chris Barry e: [email protected] publication editor: Joanne Birtwistle e:[email protected]
business development manager: Phil Birkhead e: [email protected] t: 0161 238 4922 f: 0161 238 4905
A question of confidence? Like much of the UK economic landscape, the North West region has gone through a degree of challenge and change in recent times. As the region picks itself up and starts to rebuild, a fundamental contradiction now exists in the Michael Hartig debate around business director, Corporate lending: risky lending practices Banking, Barclays are recognised as a key cause of the credit crunch, but widespread calls abound for banks to relax their credit criteria and lend more to businesses to jump start the economic recovery. Much of the insistence on increased lending comes from genuine concern among politicians and business groups and through business surveys that reveal a significant proportion of companies remain concerned about their ability to obtain bank lending if required. At the same time, there is a general agreement that pre-credit crunch lending became too relaxed, with credit conditions lowered to the point of irresponsibility by some lenders to get more business through the door. As the economy quickly deteriorated in 2008, these credit decisions soon became write-offs, eventually creating another destabilising element to the entire financial system. Barclays is committed to finding the right balance between these competing ideals. A key question in deciding where the balance in lending lies is who should determine the right level of lending in the economy. Is it banks, business groups or politicians? The view from Barclays is ‘none of the above’; it is businesses themselves who must make the right borrowing decisions for their organisations. Yes, the banking sector has a crucial role to play, providing a range of funding for investment and expansion. However, one of the main constraining factors across the region is demand. Just as most individuals would not look to borrow their way out of difficulty, a huge number of our clients are adopting the same position. Despite the ‘banks are not lending’ rhetoric, the reality is that demand for lending is down significantly as companies deleverage, seeking to strengthen and restructure themselves to tackle the vastly different economic landscape that we all face today.
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Barclays takes its responsibility to lend extremely seriously. We have remained open for business throughout the recession – by way of illustration, in 2011, Barclays advanced £43.6bn in gross new term lending to businesses in the UK, including £14.7bn to SMEs, and is always seeking further opportunities to lend to viable business propositions. Furthermore, Barclays’ approval rates for credit applications from businesses have remained consistent with their high pre-recession levels.
‘A key question in deciding where the balance in lending lies, is who should determine the right level of lending in the economy.’ While the regional economy may be struggling to take off at present, there are examples of well-managed, well-funded companies with the right strategy that are achieving significant growth. They are gaining market share by moving into new markets, or in some cases growth through a well-executed strategic acquisition. That will only happen if businesses are prepared to invest. There is only so long a business can defer investment, whether it is in jobs, new premises or exploring new markets. If uncertainty is the new normal, companies need to have greater confidence in their own ability to grow proactively. There are many success stories among our client base, with a common element being those organisations that have looked past external economic conditions and outperformed competitors to gain market share and break into new markets. Indeed, increased confidence and therefore investment feeds into a positive cycle in which growth is an inevitable output. Banks have a key role to play in supporting this cycle. So the answer to the question of lending, at least at Barclays, is straightforward. We lend responsibly; we price according to risk; and we are open for business at a time that offers real opportunities for many viable businesses to acquire, expand or invest. We’re ready and able to provide the right support to those preparing to take this journey.
The landscape for lending Getting businesses borrowing and back to growth. THE financial crisis has resulted in a new landscape for financiers and businesses seeking funding alike. The rules have changed and although lenders have become more pragmatic that does not mean funding isn't available. Events of the last few years and ongoing uncertainty within the eurozone and wider financial markets have left many businesses reluctant to borrow. Damian Waters, North West director of the CBI, says things remain understandably tough and that most businesses are of the opinion that 2011 saw the bottom and that they are on the way back up, albeit slowly. “Previous recessions have had a sharper bounce back. This will be a long slow recovery,” he said. Indeed, lenders now have the task of encouraging businesses through their doors to get them to start borrowing again. Phil McCabe, senior policy adviser at the Forum for Private Business, points to recent Project Phil McCabe - senior Merlin figures policy adviser, Forum for which show Private Business that, collectively, the banks fell short of hitting their business lending targets. He added: “However, there are signs of progress. Perhaps driven by the emergence of competing
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banks – not to mention alternative funding solutions such as crowd sourced funding in addition to incentives for equity investors – banks are actively saying they want to lend to small businesses, but argue that demand is down.”
‘Previous recessions have had a sharper bounce back. This will be a long slow recovery.’ Michael Hartig, director of Corporate Banking at Barclays, argues that against a backdrop of reduced lending it is taking market share. He said: “Barclays has seen its lending grow and has taken market share from the competition. Term lending has grown to £43.6bn in 2011, with £14.7bn of that being gross new lending to the SME sector.” While many companies have recovered since the dark days of 2008, the economic crisis continues
TheBusinessDesk.com North West - Access to Finance - Feb 2012
to challenge businesses. Some are still uncertain and have retained the defensive formation Michael Hartig - director, Corporate Banking, they adopted Barclays when their survival instincts first kicked in. Hartig said: “Our desire to provide corporates with working capital and investment has not changed over the cycle. But corporates at the top end have been deleveraging: paying down debt and/or going to the bond or equity market to give themselves cash. “Because they are deleveraging, businesses are not making big strategic investments. They are perhaps holding off acquiring a target business and waiting to see how the market pans out.” Businesses putting projections together still feel they have no certainty that those growth plans will come about.
Jason Hiley, partner at accountancy firm PKF in Manchester, added: “Corporate acquirers Jason Hiley may have partner, PKF strong balance sheets and cash reserves, but may hesitate to conclude transactions because of concerns about getting the timing wrong or because they may need to preserve cash for potential hard times ahead.” That continued uncertainty has meant that banks and their clients are taking a more in-depth view of their affairs.
How North West businesses see the UK as a place to do business in 10 years time 10% 23% Much better Somewhat better 25%
Somewhat worse Much worse
17%
Don't know 15%
10%
How North West businesses see the region as a place to do business in 10 years time 4% 2% 9%
Hartig said: “Post 2008/09 the bank has made a big shift in its approach – with a renewed focus on spending more time with clients and reassuring them that we understand their issues.
23% Much better Somewhat better The same Somewhat worse
30%
‘Banks and their clients are taking a more in-depth view of their affairs.’ “Our relationship directors are looking after smaller numbers of clients and spend more time with each client.” He added that those businesses that have survived what he called “the most challenging times in recent memory” understand the need to be on top of their numbers and report that – and the benefit of being in touch with their banks. “Those trading have taken tough action and made tough choices – the companies that are left have been doing it right,” he said. However, there is now less loyalty between a business and a lender
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The same
Much worse Don't know
32%
What North West businesses predict the predominant economic pattern will be in the UK in 10 years time 13%
1% Steady and sustained growth No growth
5% 47% 14%
Negative growth Boom and bust Modest or minor growth Don't know
20% Source: Barclays 2012: How businesses see the future. Published August 2011
than there was previously, according to Nick Kindon, managing director for Bibby Financial Services North West.
of view, providing a high-quality and
He said: “From the lenders’ point
customers.
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professional service is more important than ever in overcoming this challenge and retaining
borrow for a long-term investment. McCabe says business owners are also waking up to the benefits of alternative forms of funding. “From invoice finance to newer, more innovative platforms such as Funding Circle and Funding Store, it is clearly advisable to shop around in the realisation that a business is likely to require a range of types of finance – perhaps including equity investment,” he said.
“With relationships mostly based on a transactional basis, businesses’ decisions are Nick Kindon - managing director, Bibby Financial also less Services North West price-driven than in the past, with simple availability of credit being the driving force as to what firms choose.”
He added: “Equally, in a new era of finance, business owners should realise that businesses able to produce and present clear financial accounts and business plans will be more likely to get the funding they need at the rates they want.”
‘BASEL III banking regulations mean that for every pound banks lend they now have to hold more.’
Hartig said: “Across the industry there has been a recalibration of terms because that’s what has been asked for by the government, and by shareholders.
Businesses need to get smarter about the way they approach accessing finance, just as financiers have had to look again at their approach to lending, in the wake of the crisis. In the past, bankers have been guilty of putting too much debt into a business. McCabe suggests that financiers need to broaden their lending criteria and move away from centralised decision making, if they are to win back business confidence.
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Although there have not been radical changes to the types of finance available in the market since 2008, the recurring terms being used to describe lending codes today are “prudent” and “sensible”.
“Cash is there – the cost has never been lower and by and large the terms haven’t changed but where they have there has been a recalculation to more sensible levels.” What has changed is that banks have had to keep more capital – the introduction of BASEL III banking regulations means that for every pound banks lend they now have to hold more. But at 0.5% bank rates are at an historic all time low and most are saying it is unlikely they will rise in the next year. It's a great time to
TheBusinessDesk.com North West - Access to Finance - Feb 2012
‘Business owners are waking up to the benefits of alternative forms of funding.’ Waters agreed: “Businesses are looking at their options more and have taken the opportunity to consider different alternatives although the vast majority are still financing in the traditional manor.” Kindon said: “The type of finance preferred by customers has largely been driven by availability of late, although financial intermediaries and business owners alike are becoming more aware of the different funding options available. “This is helping to grow awareness among the North West's business community of the range of finance options out there, including invoice finance.” Hartig concluded: “There are opportunities, such as for businesses to buy another business, but it is twofold – there is also uncertainty. “So if, for example, a customer finds their payment terms have been changed from 60 to 90 days, if they come and flag it up early, we can help.”
Choosing the right type of finance for your business Knowing which financial product is best suited to your company’s needs will not only help your application be approved, it could also keep the costs of borrowing down. Choosing the right type of business funding is all about planning and preparation. A company director must have a good understanding of exactly what the funds will be used for to know what the best type of business finance is to achieve this. But a company director should not just think about how the debt is structured – but the structure of the whole deal and sometimes even the structure of the company itself. Michael Hartig, director of Corporate Banking at Barclays, said: “A business has to think about what the right type of capital structure is – the ideal split between debt and equity.” Phil Mcabe, senior policy adviser at the Forum for Private Business, added: “While debt finance is the most valued type of funding among entrepreneurs, partly because they do not have to sacrifice a stake in their businesses, equity investment should not be ruled out as an option. “In addition to upfront funding to take a firm to the next level, on offer can be important advice, guidance and information – particularly from angel investors.” Funding from debt and private equity providers is available for strong performing businesses with a well developed strategy. However, the current climate means there is a competitive private equity market, but a more limited number of debt funders willing to put funds into transactions, particularly in the SME space. For larger businesses with a good track record of profit there is appetite from debt funders, according to Jason Hiley, corporate finance
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partner at PKF in Manchester.
Street in Manchester.
Hiley added: “Below this level, some funders are still very active, particularly if businesses are in
He is seeing a more collaborative approach between debt and equity providers to fund buy-in management buyouts (BIMBOs) and management buyouts (MBOs).
‘The new North West Funds are helping to unlock both debt and equity funding.’ certain target sectors. The new North West Funds are also helping to unlock both debt and equity funding for companies, which is a positive move in a challenging marketplace.” As far as corporate acquisitions are concerned, there are examples in the market of the banks being prepared to compete for the best opportunities; particularly if it is a sector they are interested in, such as healthcare, according to Tony Harper, partner and head of corporate for Brabners Chaffe
TheBusinessDesk.com North West - Access to Finance - Feb 2012
He said: “Naturally as this process starts it will be Tony Harper - head of the most corporate, Brabners compelling Chaffe St, Manchester and attractive opportunities that will secure support. Banks and private equity houses are now talking much more positively about improved conditions and opportunities but measured against the size and volume of transactions completed in the recent past there is still a way to go.” When it comes to debt, as a general principle, the type of the loan being applied for should match the type of asset being financed.
For example, the purchase of premises is a long-term financing obligation with the ability to offer the property as security and this should command the support of a fixed-term loan over a relatively long period. But the introduction of BASEL III banking regulations, which strengthened bank capital requirements and introduced regulatory requirements on bank liquidity and bank leverage, has meant that banks are having to find new ways to approach
mortgage products, to keep the cost of lending down. Typically, of the more traditional forms, overdrafts are valued most for day-to-day business expenses and loans used for growth, innovation and diversification. But BASEL III rules also mean that even if a business doesn’t use its overdraft, that overdraft will still have a capital cost to the bank. And although an overdraft still has its place, there has been a general move away from this to more structured types of funding.
Harper said: “Increasingly these days the banks and other asset based lenders focus on lending against the security of book debts or other assets.” Invoice finance can be used to fund working capital and Barclays has seen a growth in the popularity of this product, particularly confidential invoice discounting. Jeremy Smith, sales finance at Barclays, said: “Invoice finance and asset based lending has traditionally been recessionary proof and once again despite the difficult general
Business Growth Fund The £2.5bn Business Growth Fund (BGF) has been set up to help fast growing smaller and medium sized businesses, by making long-term equity investments to fund a wide variety of requirements from increasing working capital to making a strategic acquisition to launching an export drive or developing new products. The fund is supported by five UK banks and invests between £2m and £10m in return for a minority equity stake. It was set up to target a part of the market that is perceived as not being so well catered for in terms of equity investment. Michael Hartig, director of Corporate Banking at Barclays, said: “I think it will be a catalyst and will help improve wider confidence in the deals market. It has a different approach and its mandate is different to what has been done before. It is fulfilling a niche.” David Colclough is the newly appointed investment director for the fund in the North. He has joined regional director Andy Gregory at the Manchester office, which opened in September.
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Colcough was formerly a director with 3i with responsibility for the Manchester office and has over thirteen years’ experience of investing in SMEs across the northern region. Colcough said: “There is an opportunity for BGF to grow that part of the market. We are deliberately taking a long-term view to the investments we make. This is unlike traditional private equity with a fixed exit plan. We are more long-term and don’t incentivise that exit.
‘We are keen to put our capital to work.’ “We are not there to buy businesses but to take a 10% to 40% equity stake to help facilitate growth in the business.” He added that the fund was looking at a strong pipeline of deals and that 90% of the deals the fund is looking at are not in competition with private equity houses. “So we must be growing the market if we are not in competition,” he said. Andy Gregory, BGF regional director for the North of England,
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added: “We are seeing a strong pipeline of opportunities across the region and are keen David Colclough - investment director, to put our Business Growth Fund capital to work so that businesses in this region have access to the finance they need to grow. “We urge business owners… to act on their growth ambitions and consider how best they can be financed for the future. At BGF we believe that equity has always been one of the most effective ways to fund a growing business and as equity investors, with interests aligned with those of business owners, we will work hard to further the growth potential of our investee companies.”
economic conditions, lending levels have held up well across the industry. Lending decisions are based more on the strength of the underlying assets, with less emphasis on the financial performance of the business. “It is particularly pleasing to see ABL being increasingly used in the financing of larger corporate transactions and the continued development of an active ABL syndications market.”
‘Many firms are turning to invoice finance because of the flexibility it offers.’ Nick Kindon, managing director for Bibby Financial Services North West, said many firms are increasingly turning to invoice finance, particularly in this climate, because of the flexibility it offers. He added: “The funding grows inline with the businesses sales growth, helping owners to cope with the peaks and troughs most firms experience without having to renegotiate a long-term financial arrangement.” For businesses struggling to manage day-to-day cash flows, trade finance is increasingly being used as an alternative way for businesses to get cash up front. Most people think trade based finance means trading overseas but it doesn’t have to be cross border. For example, if you are a manufacturer with a big order from a major Plc the bank would look at instruments like a bill of exchange, where the Plc promises to pay at agreed date in the future. It can help with cash management – a business can manage its cash flow by collecting debt faster and paying slower.
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The Hut Group - acquiring to bolster organic growth ACQUISITIONS and surging international business have sent online retailer The Hut Group’s sales up 70% to a record £143m in the year to the end of December 2011. The Northwich-based group’s websites, which include zavvi.com, lookfantastic.com and mylabel.co.uk, had received 78 million visits last year. Around 92% of sales came from its own sites, with the balance coming from major retailers it supplies. Demonstrating the group’s appeal beyond these shores, 35% of total revenues came from international sales - with zavvi well established in Spain and the Netherlands. Chief executive Matt Moulding said: “Our focus on delivering best in class value and service to our UK and international consumers has enabled the group to gain market share, particularly in the final quarter.
‘We always communicate with the bank when we are thinking of an acquisition.’ “Our business model positions us well against the backdrop of a challenging High Street retail environment and the continuing sales channel shift towards online retail the group is very well placed to continue its high growth. “Our focus for 2012 is on driving strong organic growth by further improving our service to our customers, continuing to expand our product range and increasing our international sales.” Steven Whitehead, commercial director for The Hut Group, said that although the company is fortunate to have an online business model that is proving resilient in a tough climate, it still requires a huge amount of investment. He said: “In terms of technology cost it is akin to how offline retailers invest in the fixed cost of their stores. People think the costs of setting up
TheBusinessDesk.com North West - Access to Finance - Feb 2012
Matt Moulding - chief executive, The Hut Group
online are lower but to do it properly you have to invest. “To do that we need equity support and debt. We have had four funding rounds in the last year and support from Barclays.” In May last year, The Hut paid £58m for Manchester-based MyProtein.com, the sports nutrition brand, and the acquisition contributed £16m in the seven months after the deal. Barclays provided an overdraft and acquisition term loan for Myprotein, as well as some debt financing. Richard Faulkner and Oliver Reece at Barclays arranged the finance for the deal. Whitehead said: “We always communicate with the bank when we are thinking of an acquisition or a capital expenditure within the business. They have a good open door policy and are very collaborative – it means you can suggest things without being afraid.” Whitehead said although The Hut is looking for acquisition opportunities, organic growth remains crucial to the company’s success. He said: “We must have a strong investment offering and still need to show strong organic growth but that can be augmented by a strategic acquisition in categories we are in but also additional categories. “We will continue to look at selective acquisitions, not just in sectors but also territories – both organically and overseas. “We fund organic growth through our existing profits and cash flow in the business and we raise equity and debt for more transformational deals.” The group, which is chaired by Angus Monro, now employs around 550 people.
Trade finance The fragile state of the UK and European economies means that developing opportunities to export products in new markets should be more of a priority than ever for North West businesses. Add the current weak pound to the equation and it could be a real opportunity to start trading overseas. The current uncertainties within Europe – one of the UK's largest export markets – mean that while it may have been the obvious choice for exporting in the past, businesses should now take the opportunity to look further afield to faster growing markets, where the rewards could be much greater. Stephen Edwards, director, trade finance at Barclays, said: “There has been a quietening down in Europe Stephen Edwards which was - director, trade finance, Barclays seen as an easy export market - but there is recognition that although it is an easy market to trade with, competition is harder. “The vast majority [of trade] does go to the EU but clients recognise that they need to go where the money and growth is. Africa, the Middle East and India are all seeing increased interest.” The so-called high growth BRIC countries – Brazil, Russia, India and China – offer huge potential gains. The BRIC economies will account for 40% of world GDP growth during 2011 and 2012, up from just 17% in 2010. Phil Mcabe of the Forum for Private Business said funding for export development is one of the main barriers its members face to accessing overseas markets.
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“The government is seeking to address this via UK Export Finance, its export credit agency, and of course the Export Credit Guarantee,” he said. But in recognition of the opportunities for UK businesses to grow from overseas trade, it is now seen as one of the biggest growth areas for Barclays and the bank has plans to double that growth over the next five years. The bank is keen to encourage its clients to look to overseas opportunities and is working closely with organisations like UKTI to give signposting, advice and support to clients.
‘Clients recognise that they need to go where the money and growth is.’ Edwards said: “I do get brought in by a relationship director if there is a good UK based business that hasn’t thought about exports before, to discuss it and help them. If we see a company that is ripe for exporting we will try and encourage that. We don’t just handle financial transactions, we try to add value to the relationship as well.” Export finance is one of the strongest areas of growth within the asset based lending industry. According to the latest figures from Asset Based Finance Association (Q3 2011) uptake of export finance has increased by 38% compared with last year, helping fuel an increase in the number of UK exporters. Nick Kindon, managing director for Bibby Financial Services North West, said: “Businesses with ambitions to break into overseas markets would do well to look at specialist forms of funding, such as export factoring, which are designed specifically to aid businesses trading overseas.”
TheBusinessDesk.com North West - Access to Finance - Feb 2012
Businesses that are starting to export, or are moving into new territories, need to ensure they have the right financial tools for the job. Not just to trade with businesses overseas but also to protect themselves and ensure they get paid. Edwards said: “There has been a return to traditional trade instruments, such as letters of credit and bills of exchange. But there are also variants of that because credit insurance has become less available. “Things like a stand by letter of credit are being used more in Western Europe or even UK to UK transactions. That sits in the background and only if there is a default of payment is a claim made. It’s less burdensome and more flexible.” If a business does get involved in an export transaction, Edwards’ main piece of advice is to talk to the bank early on. “Don’t take it for granted that existing structures are a) suitable and b) available for that transaction – sometimes we can fund something in a much better way. Trade finance uses basic instruments but it is more about how we package those together for a trade finance solution that is the most appropriate way to fund the business.”
What a financier is looking for - stating your case TheBusinessDesk.com has asked North West financiers and advisers for their top five tips on what they look for in a lending application. A focused management team
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A financier will want to know about all the key people in management, what experience they have and what they have done previously. Michael Hartig, director at Barclays, said: “Before anything else it’s the management team. We will look at what the client has done to demonstrate that strength.”
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Up-to-date financials
A key thing banks and financiers will be looking for the business to demonstrate is that it can repay the loan and that the debt is serviceable.
‘A financier will want to know about all the key people in management, what experience they have and what they have done previously.’ Banks will want to see details of current financial performance and an understanding of what influenced an increase/decrease in revenue either way. Hartig said: “There should be a focus on cash generation. Where is it for the business? That’s where the bank will look for its source of repayment. It’s about cash flow and cash generation.”
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A well thought out business plan They will also want to know the background to the business: including its structure; what it does; where it’s coming from; and where it is now. On top of setting out how much the business is looking for and what the money will be Michael Hartig - director, used for, Corporate Banking, a more Barclays expansive outline of what the business is trying to achieve, the business’ own anticipated contribution and its long-term goals will help to put this information in context. Tony Harper, partner and head of corporate for Brabners Chaffe
TheBusinessDesk.com North West - Access to Finance - Feb 2012
‘Banks and financiers will be looking for the business to demonstrate that it can repay the loan.’ Street in Manchester, said: “Any investment decision at the moment is more difficult to obtain and success depends upon a well thought out, structured and convincing written proposal with supporting data.” Jason Hiley, corporate finance partner at PKF in Manchester, says getting these basics right is essential. He said: “[That’s] a convincing team with a clear vision distilled into a thought-through business plan, with well prepared financial projections.”
The role of advisers When hammering out a funding deal, the use of good advisers will pay dividends as it should maximise the chance of success and help ensure the most competitive terms.
Jason Hiley partner, PKF
Advisers will help to ensure any business plan is well written, considering downside risk as well as upside potential.
Jason Hiley, corporate finance partner at PKF in Manchester, said: “A good adviser will present the business proposal in the right way, and pitch it to funders who are interested in that type of lend. This should streamline the process and increase the chances of success on the best terms.” Professional advisers see a lot of deals going through and are
Realistic business forecasting
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As well as outlining a company’s recent business performance, a plan should also include forecasts. This does not have to be set in stone, but neither should a business produce a forecast purely for the benefit of the bank.
‘Dialogue between the client and the bank is crucial. No-one likes surprises on both sides.’
therefore well placed to advise on whether or not the terms offered are competitive.
‘Advisers will help to ensure any business plan is well written, considering downside risk as well as potential.’ Tony Harper, partner and head of corporate for Brabners Chaffe Street in Manchester, said: “One cannot underestimate the benefits which derive from the funding proposal having been subjected to the scrutiny of professional advisers.” Professional advisers can also help to identify which sources of finance are most appropriate to the business’ need. Harper added: “[They] can be invaluable in identifying which institutions have a particular appetite for that type of finance at any one time.”
Richard Harding, partner at Ernst & Young in Manchester, said: “Those that can Richard Harding partner, Ernst & Young assess and Manchester benchmark their business against peers and market, revise their business plans in a credible and robust way, identify risks and uncertainties and build those into contingency plans based on different scenarios will be most successful.” Hartig added: “We look at whether
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TheBusinessDesk.com North West - Access to Finance - Feb 2012
He added that banks are impressed both by the fact that a business has taken professional advice and that the proposal has the support and endorsement of a professional firm. Michael Hartig, director at Barclays, agrees that including advisers in the process, when hammering out a deal is worthwhile. Hartig said: “Don’t be embarrassed to get the best adviser team around you. Some businesses think about the cost and think they can do it all themselves but that cost pays dividends so you should get the best possible deals team.”
they have contemplated downside scenarios.”
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Open communication
Banks are keen to attract and retain new business and as such have invested in their front line to ensure they have the time and resource to assess and understand a client’s business. Two years ago a relationship director at Barclays would have had significantly more clients to manage, whereas now they have fewer clients and more time to spend with them. Hartig said: “A good level of
‘If an initial application is declined ask your bank for feedback to understand why.’ dialogue between the client and the bank is crucial. No-one likes surprises on both sides of the relationship. Transparency and openness means it is easier to tackle problems if there is a bump in the road. “Treat your banking partners as a long-term partner. Don’t just think about the immediate transaction but the longer term.” If an initial application is declined ask your bank for feedback to understand why. Also ask how you could adjust your business model to help secure funding and what elements of your plans may need further consideration - a ‘no’ now may not mean a ‘no’ in the future. Richard Harding, partner at Ernst & Young in Manchester, said: “Successful companies will be those that develop a capital strategy that meets their wider corporate objectives, navigates extremely volatile funding markets and secures financing on competitive terms.”
Chess Telecom - on the acquisition trail cross-selling opportunity to provide our new customers with a suite of products to help improve their business communications.”
CHESS, the privatelyowned independent telecoms company, has made eight acquisitions in the last year, after sealing a £21m funding package with Barclays to support its strategy for growth. The Alderley Edge company offers communications products including mobile, fixed line and calls, broadband, maintenance, VoIP and data. In the year to the end of April 2011, it grew turnover 12% to £32.7m. Its earnings before interest, tax, depreciation and amortisation (ebitda) rose 34% to £7.1m and profits by 31% from £3.5m to £4.6m. Chess most recently bought Lincolnshire firm Directory Business Services in December. DBS Richard Btesh specialises in director of acquisitions, providing Chess Telecom businesses with non-geographic telephone numbers, and Chess has said it will add £1m to annual turnover. DBS, which will bring 2,800 customers and its online ordering system and websites to Chess, will continue to trade as a web services and online marketing company. Richard Btesh, director who leads acquisitions at Chess, said: “This acquisition gives us a great
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TheBusinessDesk.com North West - Access to Finance - Feb 2012
David Clarke, of DBS, added: “Chess have built a reputation as acquisition experts and that title is well deserved. I’ve been hugely impressed by the level of professionalism at every level and at each stage of the acquisition process and am confident our customers will receive an exceptional level of service with Chess.”
‘This acquisition gives us a great cross-selling opportunity to provide our new customers with a suite of products.’ The £21m funding deal was arranged by Barclays in Manchester, led by Richard Faulkner, the bank’s relationship director for technology, media and telecoms. He was assisted by debt finance specialists Glenn Clarke and Oliver Reece. Mr Faulkner said: “Our industry focus and thorough understanding of the telecoms sector has enabled us to structure a finance solution that fits well with Chess’s acquisition strategy.” Richard Btesh added: “The funding received from Barclays demonstrates the success of our strategy of acquiring small to mid-sized telecoms businesses. Barclays demonstrated clear understanding of our sector.” Chess has carried out 48 acquisitions in the last six years and now employs around 150 staff. As well as acquisitions, cross-selling additional services to its 20,000plus customers has been a key driver of Chess’ growth.
Round table discussion The deals market is still adjusting to a new way of doing business.
Attendees: Chairman: Chris Barry - editor, TheBusinessDesk.com Michael Hartig - director, Corporate Banking, Barclays
David Colclough - investment director, Business Growth Fund
Gregg Davison - corporate partner, Pinsent Masons Mike Reeves - managing partner, Clearwater Corporate Finance Ryan Bevington - investment director, Maven Capital Partners
Nigel Birkett - debt advisory partner, Deloitte
Damian Waters - North West director, CBI
Iain Wolstenholme - partner, Gresham Private Equity
Jeremy Smith - director, sales finance, Barclays
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Access to finance - round table attendees
THE region’s deals market is bursting with potential – there are plenty of businesses ripe for the picking, private equity firms with lots of cash to invest and debt is available for the right deal.
Damian Waters, North West director for the CBI, said: “I spend four and a half days a week seeing the chief executives of businesses that are household names. 2011 hit the bottom and 2012 will start to see the long slow road to recovery.
Yet deals themselves are proving hard to complete and when they do get over the line it is often the culmination of a long, slow process.
‘Although many businesses are doing well, confidence is affected by the scaremongering of rolling news.’
So where’s the disconnect? Dealmakers and advisers say it comes down to two things: business confidence, and a need for everyone to adjust their expectations to the post Lehmans world. That was the view largely shared by experts around the table at TheBusinessDesk.com’s round table discussion, held at Barclays’ offices in Spinningfields, Manchester. On confidence, the view was broadly that although many businesses are doing very well, their confidence is affected by the scaremongering of rolling news and its message of doom and gloom.
TheBusinessDesk.com North West - Access to Finance - Feb 2012
“We are in a difficult period. It’s a bit like running a marathon – it’s great that you got half way but then you realise you have still got another 13 miles to go. Our worry is that growth has become a political issue.” Michael Hartig, director, Corporate Banking for Barclays, agreed that constant bad news flow is bashing business confidence. He said: “Lots of businesses are doing well but they turn on the TV
they are not reported so much so people feel better. We have got to get on with business and try to build confidence.”
All agreed their approach to accessing finance had changed and that fundability was still an issue.
The CBI’s Waters said the membership organisation’s Washington office was incredulous at events unfolding over in the UK.
‘If we look to India and China - that’s where interest and inward investment will come from.’
“They wonder what’s going on in the UK and ask why we are so anti business,” he said.
David Colclough - investment director, Business Growth Fund
and think ‘we must be the outrider’. We need more of these companies to say how well they are doing. The pipeline on the face of it is starting to build but sentiment is not helping matters.”
‘Uncertainty surrounding developments in the eurozone has impacted confidence.’ The Business Growth Fund was set up to fill that equity gap of £2m to £10m and give businesses funding options they have not had until now. David Colclough, newly appointed investment director for the North at the Business Growth Fund (see box p8), said: “Most of the businesses I have met are hugely optimistic and are turning a blind eye to the media. Often they are constrained by access to finance and what those options are.” However, uncertainty surrounding developments in the eurozone has also legitimately impacted confidence. Hartig said: “Pre-Christmas it was constantly in ther news and while the issues have not been resolved,
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Iain Wolstenholme, partner at Gresham Private Equity, agreed. He said: “Large US trade buyers and investors are seeing what’s going on in the eurozone and wondering ‘why would we open new factories, or make acquisitions’, especially as their own [US] economy is moving into growth.” He added that although we in Europe think there is a global recession, figures actually show that most countries around the world are still demonstrating decent growth rates. Mike Reeves, managing partner at Clearwater Corporate Finance, and Ryan Bevington, investment director at Maven Capital Partners both picked up on this point – adding that they had been involved in a lot more cross border deals with overseas acquirers over the last five years.
Bevington said: “That whole dynamic has changed now. A lot of deals now will try and find an alternative solution, rather than going to the bank, we are funding more ourselves. I think it’s harder at the smaller end of the scale, looking for £5/6m of debt. What was the equity gap is now the debt gap.” Those businesses with strong growth and little debt have reason to be optimistic but for those with debt that are highly geared, there is a big difference. Nigel Birkett, debt advisory partner at Deloitte, said: “For a larger business with a fair amount of debt, access to finance is important. A lot of businesses have the wrong capital structure. They got a lot of debt three or four years ago and
“The US is quite insular but if we look to India and China – that’s where interest and inward investment will come from. Over the next few years we will see more China businesses making a move for businesses over here,” said Reeves. Gregg Davison, corporate partner at Pinsent Masons, added: “The entrepreneurial spirit is quite alive with overseas buyers. With them, deals can be quickly done whereas UK buyers lack that confidence. North West deals are going to be with overseas acquisitions because they have that confidence.”
TheBusinessDesk.com North West - Access to Finance - Feb 2012
Gregg Davison - corporate partner, Pinsent Masons
longer and longer. That’s to do with confidence in the market.” Hartig at Barclays said: “There is lending capacity out there for the right business… corporates have deleveraged and are keeping the cash.”
‘More private equity firms are looking to add value by investing in the business and the people.’ now they have to refinance that. The problem is that these businesses are not going to grow or improve so they have to be addressed.” Wolstenholme said education is still needed on what private equity can do, particularly in the lower and mid market.
More private equity firms are looking to add value by investing in the business and people, then refinancing later on.
“People see Dragons’ Den and think that’s private equity but then they also see the Southern Cross debacle,” he said.
Colclough made the point that private equity could help to get good businesses into better shape but added that less debt was available for such deals, so private equity firms are being forced to accept lower returns.
“We have always fairly conservatively leveraged our portfolio companies and focussed more on earnings growth rather than maximising our returns by putting the most amount of debt into a structure.”
Bevington said: “There has been a return to the old style - investing in the lower to mid market and trying to improve businesses rather than not doing anything and flipping it onto the next private equity house.”
‘People see Dragons’ Den and think that's private equity.’ Davison said that private equity gets a bad press for being shorttermist, with the view that a private equity house is looking for an exit almost as soon as it has struck a deal. But, he said, it is much more long-term and strategic than listing on the stock market, where businesses can “become obsessed” with the share price.
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“That leads to short-termism,” he said.
Jeremy Smith, director, sales finance at Barclays, added: “From an asset based lending perspective our industry has traditionally been regarded a recessionary proof industry. The lending decisions are made with a bias towards the strength of the underlying assets and less so on the financial performance of the business. “That said, our industry statistics suggest that whilst overall lending values have remained steady, there has been a significant fall in client numbers in the SME space, particularly in the sub £5m turnover space, although there is still a competitive market out there that wants to lend.”
Hartig added: “If you have delivered on the first six months of the business plan and improved things it makes the business eminently more bankable, and it will get a better deal. It provides certainty to the vendor as well.” Bevington added: “It de-risks it as well. Many deal transactions are post event deals. You can de-risk six to 12 months down the line. That’s a trend we’ll see continue.” Davison said: “When we get instructed we hope the debt issue to support the transaction has been resolved but we find they take
TheBusinessDesk.com North West - Access to Finance - Feb 2012
Iain Wolstenholme - partner, Gresham Private Equity
