Business Spectator special issue
Financing
Growth
3 Is it time for your business to refinance?
4 Why paying cash isn’t always king
5 The advantages of escrow finance
6 Why you should keep your lenders in the loop
8 Do you have a clean credit record?
9 Why Letters Of Credit are a good finance
option
10 What the Personal Properties Securities Act
means to you
11 Matching the finance loan to the asset life
12 Taking a safe approach to equipment
financing
13 How do I get a government grant?
Proudly brought to you by
3
Is it time for your business to refinance?
With interest rates on the way down, now would be a really
good time to have a look at your current finances in case a
bit of tweaking is in order.
The Reserve Bank has announced two cuts to official interest
rates since the start of May, first reducing the cash rate by 50
basis points on May 1 to 3.75 per cent, and then making a
further cut of 25 basis points to 3.25 per cent on June 5.
This is all good news for businesses either wanting to
take out new borrowings, or for businesses with existing
borrowings wanting to review their current arrangements and
perhaps also shop around for a better deal in the financial
marketplace.
See your accountant
A good starting point for the process is to make an
appointment with your accountant to go over your overall
plans and financial goals. You should see or speak to your
accountant before the end of the financial year anyway, and
with only a few days left before June 30 time is really of the
essence. Your accountant should be able to guide you in
terms of determining the state of your business’s finances as
well as your capacity to borrow if required.
See your bank manager or finance broker
Next, make an appointment to see your bank manager or
finance broker to discuss your specific needs. If you are
looking at refinancing your existing loans, ask whether
restructuring your facilities into a new finance package is
the best option. Ask about what products are available,
the current interest rates on offer, and how easy it would
be to switch your facilities over if switching makes sense.
The same applies if you are looking at taking out a new
finance facility. You will need to provide details of all existing
finance facilities in place, your latest financial accounts, and
to be well prepared with documentation if you are looking
at additional funds to purchase assets such as plant and
equipment or property.
•
Line of credit
Another option for funding is a business line of credit or
equity loan, which can be put in place and allow you to
draw down funds from an account up to an approved
limit. The funds in the account are available at any time,
and interest is only payable on the outstanding balance.
•
Fully drawn advance
This type of facility enables access to funds upfront
and is used for long-term investments such as a new
business or equipment that expands the capacity of the
business. An advance is the same as a term loan with
a scheduled principal and interest repayment program,
with the funding secured by a registered mortgage over
a property or business asset.
The conditions are right for a review of your finances, so it’s
time to make some enquiries.
What sort of business facilities are available?
The financial products landscape is ever-changing, and it’s
always good to be up to speed on the products available
to optimise your business. Banks and other lenders offer a
range of business loan facilities including overdrafts, lines of
credit and fully drawn advances.
•
Overdrafts
An overdraft facility can be very useful for any business
needing to draw down funds for working capital before
income is received. You will need to set up an overdraft
account with your lender that has a set overdraft
limit, and the funds used can be either be secured or
unsecured. But overdrafts should only be used for shortterm working capital needs, and if longer-term funding is
required you should be looking at other funding options
as well.
Proudly brought to you by
Return to contents
4
Why paying cash isn’t always king
There is an old saying that cash is king.
But that isn’t always the case. In fact, businesses that pay
cash for capital equipment are getting no real benefit for
wasting a valuable resource that is not easily replaced.
Companies that pay cash for capital equipment are utilising
their working capital and risk not being in a position to have
cash available for strategic purposes, ones that offer the
business a real advantage.
Over five years, if you consider the opportunity cost of using
cash against the finance costs in stand-alone equipment
finance, the outcome is almost the same. This begs the
question: why use cash and lose the advantage of having it
available at a real time of need?
What are the benefits of finance over cash?
to receiving slow payments from their clients. This, in turn,
impacts the business’ ability to pay its suppliers, staff and
expenses, which impact the integrity of the business.
A depleted bank balance puts a business at greater risk
of failure or stifled growth. Businesses often prefer not to
borrow on the premise that debt is risky, whereas financing
for equipment actually improves cash flow, can be taxeffective and protects a “war chest”.
By retaining access to cash the business is positioned to
negotiate discounts off invoices for early payment. It would
be realistic to negotiate a 3-5% discount for payment on
7-14 days, which translates into significant savings on cost
of goods sold.
There are many benefits to financing equipment. By retaining
flexibility of your cash you maintain control over your working
capital and when financed the right way, the facility will
not require additional security in the form of property or a
debenture charge.
In summary, if you have cash in the bank, it’s better to keep it
there and use it for a rainy day.
Some options for your cash
Instead of depleting your business cash reserves, one
options is to place your excess cash in a savings account.
However there are other options to produce a similar or
greater return. Think about how much more revenue or profit
you could generate if you:
• Increase your sales team. What additional revenue could
one new sales person create?
• Increase advertising and marketing.
• Bulk buy raw materials.
With the recent events surrounding the global financial
crisis, many businesses are struggling with cash flow due
5
The advantages of escrow finance
Are you looking to purchase new equipment for your
business in the near future?
If you are, even if you’re waiting until the new financial year
to take advantage of the federal government’s recent budget
incentives for asset purchases that come into effect on July
1, it’s worth noting that a growing number of businesses are
turning to unsecured escrow finance facilities to fund plant
and equipment purchases as a means of preserving their
working capital.
What is an escrow finance facility?
In many cases, a critical element of funding new machinery
requires a deposit and then subsequent instalments while the
equipment is manufactured or imported from overseas.
Escrow finance facilities are very useful in that they allow
for progressive draw-downs from a line of funding while
machinery is being manufactured, rather than full payment
up front.
Escrow facilities are interest-only, with the borrower paying
interest on what is drawn down under the facility on either
a monthly basis or rolling payments over to the time
the machinery is delivered. They generally run up to six
months, with borrowers typically rolling them over into a
hire purchase, chattel mortgage or finance lease when the
escrow facility reaches the end of its term and goods are
ready for commissioning.
What are the benefits?
Taking out an unsecured escrow finance facility means there
is no need to provide additional security such as mortgages,
or fixed and floating charges over the borrowing entity.
They are also good for cash preservation. In fact, the primary
reason why more businesses are accessing escrow products
is that they allow them to free up cash flow, which is critical
in maintaining the operation of any business.
This type of finance is extremely valuable for both suppliers
and purchasers of new equipment as it allows for a smooth
drawdown to the supplier on a regular basis. This is often a
deciding factor as many suppliers of large equipment will not
begin production or importation of the equipment without a
cash commitment from the perspective client.
An escrow facility allows the supplier to maintain production
on the new equipment and also allow the purchaser to
commit to the purchase without tying up their cash reserves.
On that basis, it’s worth putting in a call to your bank
manager or finance broker to discuss your escrow finance
facility options.
Proudly brought to you by
Return to contents
6
Why you should keep your lenders in the
loop
Does your business have a good line of communication with
your bank?
It may not sound important, but keeping your lender in the
loop on an ongoing basis should be considered a priority.
Indeed, with the number of businesses being forced into
administration rising, many finance industry experts believe
that this could be reduced if more businesses had better
communication with their lenders.
Banks should be considered as more than just a finance
provider – they should also be seen as your business partner,
taking the time to understand your business, your industry
and your personal and business aspirations. As such it’s
important that businesses treat their bank like a business
partner by keeping them up-to-date with potential issues that
may impact the business.
SMEs should inform their bank about activity that may
impact the business’s cash flow, discuss major purchases
such as new equipment or technology with their bank
ahead of time, and any personal changes such as illness or
extended leave that may impact the day-to-day operations of
the business.
Understand the terms of your loan agreement
Having a good handle on your loan structure, particularly
all responsibilities and default trigger clauses, is vital. This
includes being aware of when the loan facility will expiry so
arrangements can be made to refinance debt if required, as
well as loan covenants.
Ensure good account conduct
SME owners need to be aware of their financial reporting
requirements under the loan, which may include keeping an
amortisation schedule detailing the repayments of principal
and interest. It is also important SMEs are aware of, and
respect, their borrowing limits.
Good creditor management
Banks also actively look at debtor and creditor management
and don’t like to see them out of proportion. In tough
economic times it is not uncommon for companies to go
under, and administrators and liquidators will chase any
business that owes money to one of their clients. This
may leave a paper trail that could end up with the owing
business’s lenders, which could affect that business’s own
credit rating.
General reporting and statutory payments
Statutory payments and reporting obligations need to be upto-date. Falling behind on company and PAYG tax payments,
BAS statements and superannuation are important early
indicators to lenders.
The Australian Tax Office now has the power to contact
banks or other lenders and deduct payments for outstanding
taxes directly from a business account. The timeliness and
accuracy of reporting information to an affected bank is often
a key risk indicator as well.
Monitoring funding requests
Banks will always want to know why an SME is needing to
borrow more money. While a loan may be to fund business
growth including the purchase of operating equipment, it also
7
may signal that a business is trying to use borrowed funds
to repay other liabilities and does not have the cash flow to
meet debt repayments.
Up-to-date insurance
Having up-to-date insurance is important to banks, and SME
owners need to ensure their business and key people are
adequately covered to reduce the lender’s risk. This includes
insurance over assets, loan insurance, key person insurance,
public liability, professional indemnity and other relevant
insurances.
Stable management
The loss of key management can be a major disruption to an
SME and, in some cases, can bring a business to its knees.
It is therefore important to make sure your bank understands
any material management change, including why it has
occurred, and how the change is being dealt with.
Proudly brought to you by
Return to contents
8
Do you have a clean credit record?
When it comes to borrowing funds, having a good credit
history is vital.
Recent changes to the credit reporting system mean that
businesses and individuals seeking to borrow money need
to have a squeaky clean record in terms of meeting loan
repayments and paying bills on time, or risk being refused
finance.
Every individual and business has a credit record based on
collected data, and even those that are aware of this may not
know what it actually says or how much information is on file.
What you need to know
Following are some points that may help you understand
how your credit rating can affect your business obtaining
finance in the future:
1. Your Credit Report lists details such as defaults,
bankruptcies and court judgements. Different banks and
financial institutions assess you in different ways; for
example, you may be refused finance by one company
but accepted by another, depending on how they look at
each judgement or default.
2. As well as credit agencies collecting information such
as defaults and bankruptcies, advanced data capture
credit reporting systems are now able to capture more
bad behaviours such as late payments on credit cards or
utility bills, even if they are just a few days late.
3. Even if a default is for a few dollars, for say a mobile
phone bill, this could result in a credit application being
declined.
4. Defaults stay on your record for up to five years, and
for bankruptcies up to seven years. Therefore, a late
payment of 60 days or more, whereby a company lists
a default, can severely impact your ability to obtain
finance.
5. If you shop around to obtain finance this can also
affect you, as every bank or financial institution will do
a credit check and this shows on your report. Most
lenders interpret these as refusals and it can affect their
decision.
6. If a default is showing as unpaid, finance companies
and banks will require evidence that this has been paid
before they will consider approving finance. Alternatively,
if it has not been paid, this would be a requirement again
before they would consider an approval.
7. It is possible to request your own credit record to ensure
it is free of any defaults. This can be done by going
through a credit agency such as Veda Advantage or Dun
& Bradstreet, who offer free access to your file in about
10 days.
Proudly brought to you by
Return to contents
9
Why Letters Of Credit are a good finance
option
If your business is a manufacturer or importer with limited
working capital, you may want to consider using a Letter of
Credit as one of your financing options.
A Letter of Credit is issued by a bank and guarantees
payment to a third party supplier for a specified sum of
money taken that all contract conditions are met.
Indeed, Letters of Credit have become an increasingly
popular method of finance for Australian businesses,
particularly as trade has increased significantly with Asian
countries such as China and India.
Added protection
Where businesses are dealing with a new and untested
supplier, Letters of Credit for capital equipment must be
structured correctly, and provided this is the case, they give
added protection in that payment terms are documented as
being subject to the supplier meeting all the contract terms.
receive payment from their customer before having to
actually outlay any of their own capital for the equipment.
Similarly those businesses using Letters of Credit for capital
equipment can receive, install and have their new machinery
up and running, generating revenue before repaying the
lender.
In other words unless the quantity and quality of goods or
imported machinery are exactly as described in the contract
and the order is delivered on time, then payments under
the Letters of Credit can be denied. The business has not
risked outlaying any capital before receipt of the machinery,
equipment or goods.
Preserving cash flow
Rather than having to pay a deposit for machinery ordered
(a deposit is often required especially with new suppliers
seeking a financial commitment before they actually
manufacture the goods) and putting pressure on the
business’s cash flow, Letters of Credit will be accepted in lieu
of a deposit by most suppliers.
In addition, with the backing of the Letters of Credit your
supplier may be willing to grant your business credit terms
of say 90 days from bill of lading, which can be useful from
a cash flow perspective. Letters of Credit also provide
suppliers with collateral security when seeking business-tobusiness finance from their own bank, or in some instances
they can assign the Letters of Credit to meet the costs of raw
materials for machinery or goods being made.
Where to obtain a Letter of Credit
Letters of Credit are a specialist financial instrument, so it’s
important to discuss your options with your business bank
manager or an independent finance broker. Either can assist
with the preparation of documentation.
As a general rule, lenders will grant a business up to 180
days to repay the amount loaned under the Letters of Credit
– calculated from the date payment is made to the supplier.
This provides those businesses on-selling imported goods
or machinery time to clear customs, take delivery, sell and
Proudly brought to you by
Return to contents
10
What the Personal Properties Securities Act
means to you
The Personal Property Securities Act came into effect
last year and has wide implications for all financiers
and businesses that supply goods to their customers or
distributors.
So what is the PPSA and how does it affect you and your
business?
The PPSA replaced over 70 pieces of law in relation to
“security interests” in “personal property”. Personal property
is not just consumer property; it is all forms of property
other than land and certain statutory licences. Commercial
equipment and stock are common examples of personal
property.
Security interests include charges, conditional sale
agreements (e.g. consignments and agreements containing
retention of title clauses), leases of goods and hire purchase
agreements. All of these arrangements are now under a
single federal regime.
The manufacturer can avoid this situation if its trading terms
and other documentation comply with the requirements of
the PPSA and if it registers its security interest within the
PPSA-prescribed time frame. However, if the manufacturer
fails to register its security interest within the necessary time
frame, it will rank behind other secured parties that have
registered their security interest.
Businesses that do not have possession of their personal
property (e.g. stock and equipment supplied or hired to
customers) must have a security agreement in place that
satisfies the requirements of the PPSA and register their
security interest on the PPS Register.
Businesses that do not take these and other steps may not
have the ability to seize or otherwise deal with their personal
property upon a debtor’s default.
What businesses will be affected by the PPSA?
The PPSA affects a variety of industries, including:
• banks and other financiers and businesses that use
finance (e.g. loans to finance business vehicles and
other equipment);
• manufacturers, distributors and suppliers that supply
goods;
• transport and logistics companies that provide transport
or warehouse services and freight forwarders and
carriers; to mention a few
What businesses need to do now?
The PPSA requires some very significant changes to the way
your business operates.
For example, if a manufacturer were to supply goods to a
business under usual 30-day trading terms and that business
were to later become insolvent, the manufacturer’s security
interest would become void. This applies even though the
manufacturer may have title (i.e. ownership) in the goods
The manufacturer would still be able claim as an unsecured
creditor but would rank behind any other financier that had a
registered security interest.
Proudly brought to you by
Return to contents
11
Matching the finance loan to the asset life
Is your business looking to purchase new assets?
If so, once your business has assessed and agreed on the
need to purchase stock or capital equipment, it’s important
to ensure the finance product is structured to reflect the
working life of the asset involved.
What sort of finance should I look for?
Specifically, it’s crucial that the term and structure of your
finance contract does not exceed the useful life of the asset
being purchased when establishing a finance agreement.
For example, if you are buying a short-term asset such
as stock, this should be funded with short-term financing
such as an overdraft facility. On the other hand, if you are
purchasing longer-term assets such as plant and equipment,
it’s important to put a long-term funding facility in place.
As simple as this sounds, many businesses don’t get it right.
They use the wrong type of finance facility to make their
asset purchases and place undue strain on their working
cash flow, which can reduce the amount of funds to pay
creditors and employees.
Getting the right balance
Finding the right balance and matching the finance facility
with the asset’s life is important.
Through matching the life of a loan to the life of the asset,
the asset can effectively pay for itself over time out of the
earnings it generates.
Quite often, borrowers can simply look at the end residual
value of their equipment and feel it will have a value equal to
this at the end of the agreement. However, this may not be
correct. Equipment will lose value over time, and sometimes
the asset’s residual value will be less than the loan payout
value.
The pay-out rate on a loan in the first three years of a
contract is often well short of the rate that the machine
drops in value over the same period. On the other hand, the
exposure to “negative equity risk” is much greater at the time
most borrowers look to replace their equipment – well before
the contract’s full term.
Done properly, your business is in a position to continuously
update its equipment in line with needs and demand. But by
getting the finance structure wrong at the outset a business
can effectively take itself out of the market to update its
equipment further down the track.
Proudly brought to you by
Return to contents
12
Taking a safe approach to equipment
financing
Upgrading or replacing plant and equipment, and ensuring
that it adheres to the required safety standards under
Australian law, can be both a costly and complex process.
Yet, these often essential upgrades – whether they involve
new or existing machinery – don’t necessarily have to be a
major burden on cash flow, time or company resources.
Good project planning from the very start is key, and that
means putting in place the best financing options and
bringing in the right experts to guide you through the
minefield of occupational health and safety.
Good financial and technical support is a powerful
combination in enabling companies to achieve the best
outcomes when making what can be a large financial
commitment to upgrade or replace their plant and
equipment.
What are the options?
Putting the right financing package in place is important from
the start, and any financing should be structured over the
useful life of the equipment – usually five years. Financing
beyond the usual life of equipment does not make good
business sense, as invariably that piece of equipment will
either be out of date within five years and will need replacing,
or it will need a substantial upgrade to make it both efficient
and compliant with safety standards.
On this point, businesses can also finance the cost of
upgrading existing equipment as required to ensure it meets
proper safety standards.
Access to finance makes it much easier for companies to
ensure their equipment is as safe as possible, reducing their
overall risk exposure.
Pricing in safety
Occupation Health & Safety laws in Australia carry
obligations for designers, manufacturers, importers and
suppliers, all the way through to employers, that require that
a risk assessment to be conducted on plant and equipment.
When you’re looking at costing the whole project you
should be factoring in risk assessment at various stages
of your project, in particular at the design stage, the precommissioning stage, and prior to operations.
If resourcing and funding for safety is factored into the whole
scope of an equipment upgrade project, and it is not treated
as an add-on element at the end, owners won’t get a nasty
surprise if they discover their equipment is exposing them
and their workers to potential risk.
Don’t wait to the last minute to think about safety. Build that
into your whole project and get your financing in place to
cover the whole scope, including those three stages of risk
assessments.
13
How do I get a government grant?
There are a wide range of grants and other funding programs
available for businesses from the federal, state and territory
governments, and in some cases from local councils.
The grants that are on offer are generally to assist businesses
in their growth activities, which includes funding for
expansion, research and development, innovation and
exporting. But grant funding can be used for a whole array of
business needs, from buying new equipment to the training
of staff, and even for activities such as advertising.
Do your research
The first step in seeking out a business grant is to find out
what’s available, and the best point to begin is the federal
government. A full listing of the grants available can be found
on the federal government’s business website at http://www.
business.gov.au/GrantFinder/GrantFinder.aspx.
Each link will take you to the website of the relevant grant
provider, and from there you will be able to read more
information and either complete a grant application online or
download the relevant documentation.
Clean technology grants
Governments will usually be more favourable to businesses
that are already in operation, have a proven track record
already, and which require additional funding to get their
business to the next level. It’s important to read all the
application material closely and to prepare your case for a
grant in detail, as the more information you can supply in
your application the better your chances of success.
Most importantly, you will need to familiarise yourself with the
various qualification thresholds for the government grants
you apply for.
The federal government recently announced a $1 billion
clean technology grants program with the aim of spurring
new capital investment across the Australian manufacturing
sector.
The grants package was unveiled by the Minister for Industry
and Innovation, Greg Combet, in mid February, and aims to
help manufacturers invest in energy efficient capital plant and
equipment, and low pollution technologies, processes and
products.
Broken down, the Clean Technology Investment Program has
allocated $800 million for general manufacturers that exceed
defined annual energy consumption thresholds, and a
further $200 million that is available to all food and beverage
processors and foundry and metal forging manufacturers.
The grants program is already attracting strong interest, with
enquiry levels from manufacturers looking at investing in new
plant and equipment having risen.
The government will match manufacturers with turnovers
under $100 million requesting funding of less than $500,000
on a dollar for dollar basis. For all other grants under $10
million, applicants will be required to contribute $2 for every
$1 from the government. For grants of $10 million or more,
applicants will be expected to make a co-contribution of at
least $3 for each $1 of government support.
Is my business eligible for a grant?
There are always qualification thresholds for government
grants, and with limited funding generally available
competition is fierce.
Proudly brought to you by
Return to contents