Financing a business Golborne
There is nothing like a credit crunch to test basic business skills. Brilliant entrepreneurs will go bankrupt while the plodders will expand their market share. When money dries up, businesses effectively have a choice between detailed, careful cash management and drifting closer to insolvency.
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Financing a business
There is nothing like a credit crunch to test basic business skills. Brilliant entrepreneurs will go bankrupt while the plodders will expand their market share. When money dries up, businesses effectively have a choice between detailed, careful cash management and drifting closer to insolvency.
Nearly nine out of 10 businesses were expecting to have to renegotiate or delay financing plans, when KPMG did a survey in summer 2008, a year after the 2007 world credit crunch began. And, according to finance lawyers, investors and venture capital companies are being more choosy and less flexible about funding companies. Agreements are more painful and take longer, meaning businesses are in for a rocky time while they wait for cash.
Banks are lending less and giving tougher terms. Creditors are taking longer to pay. For bigger businesses, the European high-yield bond market has dried up in 2007/08 and equity markets – as evidenced by the HBOS rights issue flop of July 2008 – are hardly welcoming.
But, despite the apparent chaos, there are very clear steps that businesses need to take in order to survive. "Deal with more than one bank," says the Federation of Small Business. And business finance specialist ASC Finance says: "Be aware that relationships with your bank can’t be depended on."
The Financial Ombudsman Service (which decides unresolved disputes between banks and business clients with less than £1m of assets or annual turnover) underlines the right of banks to end overdraft facilities even though they "must act fairly" by giving clear notice beforehand.
For these reasons, businesses have to take such steps as scrutinising (and negotiating) their business terms with their banks, having back-up plans in place, monitoring cash flow (and especially overdrafts) scrupulously, checking the credit worthiness of new clients and continuously evaluating new credit sources in order to get money on good terms.
Legal advice at crucial points can prevent firms from going through crises further down the line. Lawyers should look at, and help negotiate, financing deals – whether from banks or hire purchase companies or other sources.
Banks may have standard contracts, but their clients can renegotiate particular clauses if they want. Common problems are expensive early repayment terms with banks – or, for instance, contracts for renting photocopiers which cannot be ended early.
In the current credit crisis, banking lawyers have reported instances of banks recalling money on a whim and then, when the business cannot pay, offering much poorer terms than the original agreement. The institutions benefit in these instances from business people being too eager to get their hands on the money (or photocopier) to give a thought to the implications of the terms.
Finance lawyers, however, should have cooler heads in these circumstances and should spot this kind of 'sting in the tail'. Experienced lawyers see a regular flow of these types of financing contracts – and they should have some idea of what is unfair or unusual.
The size of deposit that needs to be put down on commercial mortgage loans is averaging (as of August 2008) 20% to 30% depending 'on the lending sector', according to Business MoneyFacts.
The background against which loans are being made is also changing – through case law, for instance, and developments such as the revision of the Business Banking Code (for companies with turnover of under £1m) in March 2008.
Many businesses will try to take longer to pay debts if they are experiencing cash flow problems – either informally by dragging their feet or by changing the terms they put on their invoices. Businesses which are waiting to be paid have various legal options open to them from the gentle (sending invoices and statements more frequently) to the stern (threatening legal action).
Careful cash management is a vital skill in difficult times and those that do not practice it are taking on far more risks than they need to.
For more information, visit Takelegaladvice.com
Nearly nine out of 10 businesses were expecting to have to renegotiate or delay financing plans, when KPMG did a survey in summer 2008, a year after the 2007 world credit crunch began. And, according to finance lawyers, investors and venture capital companies are being more choosy and less flexible about funding companies. Agreements are more painful and take longer, meaning businesses are in for a rocky time while they wait for cash.
Banks are lending less and giving tougher terms. Creditors are taking longer to pay. For bigger businesses, the European high-yield bond market has dried up in 2007/08 and equity markets – as evidenced by the HBOS rights issue flop of July 2008 – are hardly welcoming.
But, despite the apparent chaos, there are very clear steps that businesses need to take in order to survive. "Deal with more than one bank," says the Federation of Small Business. And business finance specialist ASC Finance says: "Be aware that relationships with your bank can’t be depended on."
The Financial Ombudsman Service (which decides unresolved disputes between banks and business clients with less than £1m of assets or annual turnover) underlines the right of banks to end overdraft facilities even though they "must act fairly" by giving clear notice beforehand.
For these reasons, businesses have to take such steps as scrutinising (and negotiating) their business terms with their banks, having back-up plans in place, monitoring cash flow (and especially overdrafts) scrupulously, checking the credit worthiness of new clients and continuously evaluating new credit sources in order to get money on good terms.
Legal advice at crucial points can prevent firms from going through crises further down the line. Lawyers should look at, and help negotiate, financing deals – whether from banks or hire purchase companies or other sources.
Banks may have standard contracts, but their clients can renegotiate particular clauses if they want. Common problems are expensive early repayment terms with banks – or, for instance, contracts for renting photocopiers which cannot be ended early.
In the current credit crisis, banking lawyers have reported instances of banks recalling money on a whim and then, when the business cannot pay, offering much poorer terms than the original agreement. The institutions benefit in these instances from business people being too eager to get their hands on the money (or photocopier) to give a thought to the implications of the terms.
Finance lawyers, however, should have cooler heads in these circumstances and should spot this kind of 'sting in the tail'. Experienced lawyers see a regular flow of these types of financing contracts – and they should have some idea of what is unfair or unusual.
The size of deposit that needs to be put down on commercial mortgage loans is averaging (as of August 2008) 20% to 30% depending 'on the lending sector', according to Business MoneyFacts.
The background against which loans are being made is also changing – through case law, for instance, and developments such as the revision of the Business Banking Code (for companies with turnover of under £1m) in March 2008.
Many businesses will try to take longer to pay debts if they are experiencing cash flow problems – either informally by dragging their feet or by changing the terms they put on their invoices. Businesses which are waiting to be paid have various legal options open to them from the gentle (sending invoices and statements more frequently) to the stern (threatening legal action).
Careful cash management is a vital skill in difficult times and those that do not practice it are taking on far more risks than they need to.
For more information, visit Takelegaladvice.com
