| Informed Funding |
is delighted to be supporting Informed Funding’s latest conference, Debt Finance for Growth on 25 May at Glaziers Hall near Bridge. This Conference focuses firmly on the best options for using debt to finance business growth. Business owners are understandably risk averse when it comes to borrowing, but today there are a very wide range of options – it’s all about matching the right type of finance to your business, something that changes as you grow.
Business owners are understandably risk averse when it comes to borrowing, but today there are a very wide range of options – it’s all about matching the right type of finance to your business, something that changes as you grow.
If a debt-based solution is the right one for your business you will need to understand the risks involved in the finance options available, both for your business and potentially for you personally as an owner/director.
The Legal Director will be participating in a session at the conference focussing on managing personal and business risk when taking on debt. In the meantime here are the key lessons we have learned from advising SME’s taking on debt finance:
Get good legal and financial advice. Our No.1 tip is – understand what you are getting yourself into. Loan documents are sophisticated contracts, full of technical language and jargon. You are unlikely to get a sympathetic hearing if things go wrong and you try to argue that you didn’t understand what you signed.
Do you have the authority to take on this liability? Do you need permission from shareholders or key stakeholders?
Make sure the liabilities you are taking on are affordable. Take advice from finance professionals to and make sure you understand the impact of interest and capital payments on your cash flows. How sensitive is the repayment schedule to unexpected events like a downturn in business?
Understand what constitutes an event of default, and its impact. This is not just missing interest or capital payments. Does the loan contract include on-going covenants – such as maintaining a minimum level of liquidity, revenues or profitability – that you need to comply with? Is there a “cure period” in which you can rectify a breach? Many lenders want the right to pull the plug if there is a “material adverse change” in your business, or if you are in default under an unconnected contract with a supplier or customer.
Watch out for penalties. If things go better than expected and you find yourself in a position to repay early, make sure there are no nasty penalties if you do so. On the other hand, if you are in default most lenders will seek to charge additional fees that often just hasten the downward spiral.
Security. Lenders will almost always want security, so what assets does your business have that could provide this? Few SMEs have real property assets so consider the value of things like book debts and stock. If the lender requires a personal guarantee, does The Lending Code (which limits the circumstances in which the guarantee can be called) apply? If not, can you introduce similar provisions into your loan agreement?
