roundtable: supporting growth No 1: Trade finance
HSBC’s Gary Rothery said trade finance was an available solution, but: “It’s often a question of education and getting the message to customers that it is actually out there. Businesses will need to have a complete trade cycle, with valid clients at the end. Banks will very rarely provide funding solutions with the ability to stock-build for a speculative reason.”
Richard Lord queried if this trade financing option actually provided funding for growth in terms of increasing working capital.
Mark Frettingham confirmed that the trade cycle structure of this facility can sometimes enable HSBC to provide a business more working capital than a normal overdraft would allow.
Forder explained that his trade financing covered the gap between his stock being sold and stock permanently in transit. “I have 700 or more accounts just buying birthday cake candles, so I have goods in containers on the water all the time.” Invoice discounting assisted his business funding when the stock was sold, he added.
No 2: Invoice discounting
William Crook said invoice discounting had worked very well for his internationally trading company. “ We’ve been doing it for 15 years. When it was first introduced it was the best tool for us as a rapidly expanding business as it grew with the business and we’ve never needed to go back to the bank. There is a premium, but it has given us flexibility.”
Funding export growth was a different matter. “When we started trading overseas in new markets like Azerbaijan and Kazakhstan there was no funding available. Our UK invoice discounting facility gave us the working capital to help fund our overseas growth. Credit Insurance was not available and we had to finance all of the risk. That’s changed now, but if it wasn’t for invoice discounting we would have struggled to get to where we are today.”
Toby Steele had considered invoice discounting, “…but we deal with services. We deliver knowledge, which you can’t take back if you don’t get paid. So, we get payment in advance whenever we can. Obviously with our bigger airline clients, we have close ongoing relationships, so we’ve established payment terms in arrears.”
No 3: Asset financing
Airline pilot training company CTC Aviation has successfully used asset financing for buying its state-of-the-art flight simulators Toby Steele revealed. “Historically it’s just a case of picking up the phone, presenting the current business plan and the finance is there, although the process has been slightly more detailed post-recession.
"There is now more scrutiny of our forward projections, but we installed a new full flight simulator last November and we still had three banks competing for the finance.”
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – MAY 2013
Lord agreed that asset finance was very easy, if the asset is perceived to be fundable. “We are also a service industry dealing with big properties. Paying rent and leasing arrangements up front can be an issue, especially since we also have to kit out the space and fill it.”
Standard lending was becoming difficult. “Our overdraft facility over the last five years has been cut every year. That’s because our projections are showing our cash improving, so the banks say we now only need a facility of ‘X’. We live with it, but it means constantly having to manage a smaller pot of cash.”
Steele agreed that a low overdraft backstop can be a concern when times get difficult. “What happens to a business if the bank won’t go beyond its facility limit?"
Frettingham said the answer to that question was the strength of the relationship between the bank and the borrowing client. “It’s OK to provide a facility for today, but HSBC aims to be there for the whole journey. We work to fully understand each customer’s strategy. We spend time talking to them about their business, and where they want it to go. We look to support their aims, find funding solutions down the line so they can achieve future objectives.”
Long-term growth ... shared with funding partners
Successful growth has to be planned. As Mark Frettingham mentioned, it is often a long journey for which the wise take guidance from professionals.
No 1: Business Growth Fund
One of those providing professional support could be Business Growth Fund, which HSBC has co-financed with four other high-street banks to create a £2.5 billion fund. This makes BGF the largest UK long-term equity investment company. It targets investment in the £2 million -10m region.
“There’s been a market funding gap, because banks provide working capital not risk capital, and sometimes there is a need for alternative funding in order to grow. BGF provides for that need,” said Frettingham.
“Yes, you have to give up some of your business, but it’s a question of ‘Do you want a slice of cake in a business with an adequate value, or a smaller slice in a business with a larger value?’ I see BGF as a helpful way of assisting ambitious businesses to grow.”
BGF’s James Austin said historically, many people have run their businesses using simple overdrafts, which is difficult to achieve in today’s banking markets. Banks needed to provide fresh 21st century solutions, but businesses also needed to remove doubt from their balance sheets – to add confidence within funding solutions.
And growth? “Lots of people have opportunities, Richard Lord
but just assume that they can’t get the funding.” The poor PR image of equity funding was “often perception rather than the reality” and BGF was now doing deals with people who said they would never sell equity to institutions.
BGF takes the long-term view, Austin explained. “We agree things in advance, based typically on the company’s own three-to-five year plans, and come in as a junior partner, a minority shareholder, simply providing support.”
BGF was willing take a stake ranging up to 40% “to help take a business to another stage. We are also keen to work with other equity institutions as an additional form of finance that gives the companies continued access to growth capital”.
No 2: Private equity funding
Last June CTC Aviation sold a majority stake to Inflexion Private Equity. “We had been funded by retained earnings and asset financing, but going forward we have expansion plans to meet demand around the world and this PE backing is exactly what we needed. It also enabled several legacy shareholders to exit,” said Steele.
“You hear mixed reports about PE but it’s worked very well for us. Inflexion has been very
Continued overleaf
www.businessmag.co.uk Steve Luckett
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