Finance
Show us the money

Looking for funding to grow your business?
You must get smart if you want to get the money. By Kevin Kevany.
To borrow and adapt an opening paragraph from February’s celebrated double-centurion Charles Dickens, “It’s not quite the best of times, nor is it the worst,” if you are looking to obtain finance to grow or sustain your business.

Yes, it is a whole lot tougher to get institutions or individuals to part with money, as the global uncertainty continues to wash over every aspect of business. Banks are tightening up on their criteria for making loans. Angel investors are looking to reinvest in businesses which have delivered a return, while those financiers in-between trim their sails to suit each situation.
The good news is that the sources of finance are not only tightening the screws on applicants, they are innovating to provide new pathways.
As we will outline, there are ways and means of getting the funding to power your SME to the next level – if you go about it the right way. And there are better times ahead, if you listen to the still-cautious experts about the current market for SME financing.
John Blackmore is national sales manager of New Zealand newcomer Bibby Financial Services, which positions itself as ‘an invoice finance specialist to small-and-medium-sized-businesses globally’.
“As the largest global specialist provider of factoring and invoice discounting services, currently providing cashflow funding to more than 5,000 SME clients and factoring around $12 billion in debts around the world across 14 countries, I believe the niche we have developed between the banks and the so-called second-tier finance companies is just right for this current New Zealand market.
“That’s not to say I don’t appreciate the caution which Kiwis have for newcomers, particularly after their own bad experience with local companies pre and post-GFC. Although we might be the biggest in our sector globally, we are adapting – like everybody else – to the new circumstances, targeting SMEs in the financing ‘sweet spot’ of $500K to $5 million, as well as SMEs looking to grow their established local business through exports.
“We are aided by the fact that Bibbys are experiencing year-on-year growth of 84 percent, with profits rising from $40 million in 2009 to a record $70 million in 2010. And we are supported by our parent, the Bibby Line Group, a Liverpool-headquartered, business-to-business services group, which in 2007 celebrated its bicentenary.
“So we might be new to this country, but we have a long, solid pedigree. If SME owner-managers are wary of our offering, I can point out that both BNZ and Heartland have both moved into our niche in recent times,” says Blackmore.
The company has operated through ‘intermediaries’ since its launch in the third quarter of 2011, but is embarking on an informational and brand-awareness campaign to explain the features and benefits to SME cashflows through getting 85 percent of an invoice paid upfront and the balance – minus a small fee – refunded after the customer has paid in full.
 
Good business forecast required
ASB’s commitment to innovation was honoured with its Facebook Virtual Branch receiving the Service Innovation Award in the 2011 BAI Finance Global Banking Innovation Awards.
Nick Stanhope, GM Business Banking at ASB has some encouraging views for business owners, “If a bank can see the success of the business and can have comfort in the quality of forecasts, then financing an overdraft to accommodate growth is much easier. Equally, a good business forecast should enable the business to plan for its growth with the bank – rather than make a last-minute call for help.”
The latter is a common theme with all funders: don’t wait until the last minute to ask for help.
Stanhope again, “One of the key questions to consider is whether your business needs debt funding or equity. Bank debt requires repayment, usually from the time you borrow, and has conditions associated with the loan. Equity can be more aligned to a longer-term view of the business – for example, an investment by someone who is looking for a return in the future, and a larger return than a bank would expect.”
He favours ‘asset finance’ which relies on the asset itself as security and, therefore, takes out the burden of relying on other equity sources, such as your home, as a means of security.
“This can be particularly relevant when a business has multiple shareholders, with different financial positions, and not all have the capability of borrowing more, personally, for the business. This is potentially a great way to fund business growth,” he says.
Stanhope, who believes “it never hurts to show your passion for the business”, notes it is important to remember there is one key difference between bank funding and venture capital (VC) or private equity (PE) funding. Banks lend money for a return, as interest, while VC or PE firms are primarily interested in some form of joint-ownership model.

Smaller amounts from investors
Which brings us to the current state of our ‘angel investment sector’, reported to have remained ‘very active’, although investors are allocating smaller amounts to each deal as they focus on supporting their existing companies rather than staking new ones.
“Last year, angels made 97 investments into young, high-growth companies – slightly behind the previous year’s record activity level. But the amount invested was $30.7 million – a decline of nearly half the amount invested in 2010,” reports Franceska Banga, CEO of New Zealand Venture Investment Fund.
She describes the trend to smaller amounts (in both new and follow-on investment) as “indicative of a maturing of New Zealand’s angel market, and is consistent with similar trends overseas, including the US”.
“Another factor is the challenging general business and investment environment which has persisted over the last two years. This has had a negative impact, both on the appetite of current angels to invest in new companies, and on the numbers of new angels coming on stream and being prepared to actively invest,” she says.
“The trends we are seeing in angel investing highlights the need for later stage funds – venture capital funds – to provide the larger investment capital to develop the companies which angel investors have been backing.”
This is a good moment to consult with Simon Thompson, CEO of Lock Finance, which has been a part-time consultant to the World Bank, via their development arm, International Finance Corporation (IFC) since 2007.
“Sometimes the easiest available cash with least conditions is also the most expensive, and has very little flexibility. Business owners need a funder who will view their relationship as a true funding partner,” he says.
We asked him how to make your SME more attractive to potential investors and what some of the potential pitfalls are, when endeavouring to secure funding from the various lending institutions.
“Firstly,” he says:
• Separate the business from reliance on personal properties, so it can be sold on a standalone basis.
• Manage the accounts receivable and inventory closely, or get professionals to help.
• Keep a good database on your customers – those relationships are what you are selling.
• Ensure you’ve got good accounting systems and up-to-date financials – don’t expect support if you haven’t got sound information to present.
“Avoid”:
• Poor planning – i.e. ask for a facility well before you need the money, not the day before. That shows weak forecasting.
• Over-optimism – get real with your budgets or financiers will be cautious and reply just as the Mitre10 TV advert intones (“Mate, your dreaming!”) says Thompson.
Another who ‘knows the game’ is Dave Cooper, national manager-New Zealand for SCOTPAC, or Scottish Pacific Business Finance Ltd, who notes, “a business will only run out of cash once”.
“Virtually every business has to borrow money from somewhere, whether it is from shareholders, friends, family, the bank, creditors, by delaying payment, the IRD, also by delaying payment, or from a factoring company.
“What is important is what you do with that money, and whether you can turn it to your advantage.”
So how has SCOTPAC allowed customers to apply that rule?
“A freight company, with an overdraft of $400,000 was growing rapidly, but didn’t have property to secure an increase to the million dollars they required. They had seasonal requirements and we were able to give them a facility of $1.5 million, secured by their debtors’ ledger. This gave them more than the bank could come close to giving them; and it was also done at a lower interest rate than the bank’s overdraft rate.
“They also decided to outsource the debt collection process to us. This has been a major benefit to them, since it has improved their ‘debt-turn’ and let their accounts staff get on with more productive work.
“The facility has allowed them to look at securing more market share, confident they can fund the growth,” Cooper says.
The final word is from BNZ’s head of corporate and specialised finance, David Blakey, “The banking sector faced some hard questions over how it could further support SMEs during the GFC, and BNZ was very deliberate in making sure it was consistent in its support of customers wherever possible. This translated into lending more to New Zealand businesses during the height of the GFC than all other banks combined.”
So did their Good Samaritan approach pay off?
“What’s important is to understand how we see receiverships and liquidations as a last resort – we push ourselves hard sometimes to explore all options for support before reaching these scenarios where no-one wins.”
We asked him for an elegant summary of the best way to engage potential investors and achieve a successful outcome.
“Have a well-articulated business model; a clear strategy and compelling, competitive position; quality management, supported by appropriate governance; a good understanding of key risks and how they are managed; and an ability to produce regular quality financial and management reporting.”
There you have it. Good luck.
Kevin Kevany is an Auckland-based freelance writer.
Email kevwrite@xtra.co.nz

Publishing Information
Magazine Issue:
Page Number:
37
Related Articles
Overcoming the potentially-deadly impact of late payments
Businesses must protect themselves from the potential consequences of consistent late payments...
2017 Accounting Software Guide
The key to a satisfying and long-lasting relationship with your business’s accounting software is...
Worried about tax compliance? Here’s good news
IRD is introducing the Accounting Income Method (AIM) from next April. Craig Hudson explains...