Background
A Bank Relationship Manager/Director had a client who approached them for a significant increase in facilities to fund the exiting of a loss making part of the business. Whilst only a small overdraft facility was in place, the majority of the borrowings (approximately £1,500,000) were with the bank’s invoice discounting arm and there was no extra security available to support the request.
The Scenario
On recent annual turnover of approximately £11,000,000, circa £3,000,000 related to an arm of the business that was declining in sales and was now 95% reliant on one client who had been applying pricing pressure and dictated terms to the extent that losses of around £200,000 were being made by that part of the business leaving the overall group trading at close to breakeven.
As the debtor was utilised in the invoice discounting facility, by withdrawing from that part of the business, the reduction in debtors would leave an initial funding gap of around £350,000.
However, this would be relatively short term as profits were projected to increase to £200,000 per annum from the lower turnover and other parts of the business were performing well.
Action Taken
Whilst the proposed actions by the directors in exiting the loss making arm of the business made complete sense from a trading perspective, the lack of extra security and need for a significant increase in facilities from the bank, made the request challenging.
The bank was prepared to consider a facility under the Enterprise Finance Guarantee Scheme (EFGS), but wanted further comfort regarding the viability of the directors’ actions and that the projected profitability and cash requirement would stand up to a detailed review.
Way Forward
The bank discussed the position with Vantis and it was agreed with the directors that a review of their plans and projections would be undertaken by way of Vantis completing a Pre Lending Review. The report confirmed the viability of the directors’ proposed actions and also showed that the cash flow had in fact been overly conservative, with the need being only £250,000 instead of the £350,000 originally requested from the bank.
Outcome
The EFGS facility has been agreed by the bank at a lower than originally expected figure of £250,000.They will be able to increase their exposure with the comfort of the wider external review and the directors are able to undertake an important strategic step to achieving increased profitability to the extent of circa £200,000.
Key Message
It is likely that as/when we move out of the recession, there will be a number of businesses that will need extra funds to help future trading/profitability. They will not necessarily be in a ‘distressed situation’, but looking to move forward and take advantage of opportunities albeit on the back of a difficult trading period that may, on the face of it, make their funding needs look full. Vantis can assist these scenarios through a Pre Lending Review by reviewing plans and projections behind a customer’s finance request, to give the banks extra input to aid their lending decision.
If you would like more information about any of the topics discussed in this article please contact Simon Glyn, Head of BRS Live Side Support Services. Alternatively please complete and submit the online form below.