I own a successful furniture business which has grown from £7milllion turnover to £65million over the last five years.
We’ve achieved this without taking on any long term debt or equity partners – instead we’ve not paid much in dividends and retained our balance sheet to allow continued growth.
We have, however, taken short-term facilities with our bank such as Trade Finance which funds imports for 120 days and Invoice Discounting which funds our sales ledger. These are both secured against either our stock or debtor book.
Last year, after deciding to invest significantly in our infrastructure with a new 400,000 sq ft warehouse, fleet of delivery vehicles, racking, fork trucks, IT software and an e-commerce website, we asked our bank to consider some term debt into the business.
What’s changed? My bank manager originally agreed to a loan, then changed his mind. Dave Fishwick replies – (stock image of furniture)
At the time of our initial meeting with our relationship manager and his regional manager, we were told it shouldn’t be a problem and the bank could look at 2x EBITDA as a term debt multiple without too much trouble.
With EBITDA of ’18/£500k, ’19/£1.5m, ’20/£6m, ’21/£13m and forecasted ’22/£5m we thought some term facilities circa £10millon as we’ve requested over five years – a £5million bullet loan and £5million over 60 months repayment – would be agreed to give us the oxygen we need to continue to grow.
Our company balance sheet as at end of Aug ’22 is £17.1million which I’m pretty proud of considering I started with £700 at 19 years old and nothing much else.
Anyway, having absolutely no joy securing any term debt with our bank I’ve engaged in discussions with multiple private equity and commercial lenders all of which have declined our proposals saying they are just too concerned about the economic outlook.
Now we have a business which I’ve invested everything into, personally and professionally which I am having to fund completely myself, privately, despite making serious profits, employing over 150 people and paying millions in tax.
I am a bit at a loss on what do to and it seems that all the money men are so nervous of the economic outlook they are blinded and it will become a self-fulfilling prophecy if everyone stops lending. This seems to be the situation at the moment.
Surely I’m doing something wrong as it doesn’t seem possible that a debt free, profitable, growing business is unable to secure funding? What can I do? Via email.
Dave Fishwick, This is Money business doctor, replies: The problems you’re having brings to mind the many problems with the current banking system as I see it.
During the last financial crisis, many of my minibus sales customers could not secure funding as banks effectively turned off the lending tap through no fault of the customer.
It seems the banks will only lend you an umbrella when it is sunny, and then they will want to take it back when it starts to rain.
I have a true story here, proving your point. I was visited by my bank manager during the height of the financial crisis starting in 2008.
The conversation went something like: ‘Dave, do you need any extra money for absolutely anything?’ And I said: ‘No, you know I don’t; my customers need the money, not me.’
He then went on to add: ‘Look, the Government has given the bank this large amount of money, to lend out and we only want to lend it to people we know that perhaps don’t need it, but we will definitely get it back from.’
It seems the banks will only lend you an umbrella when it is sunny, and then they will want to take it back when it starts to rain.
I ushered him out of the office stating something along the lines of: ‘You need to lend that money to the people for whom it was provided and who desperately need it to save their business.’
I was so disappointed in the big banks that I started lending my own money to my customers, and they paid me back. I then realised this banking malarky wasn’t all that difficult.
It led me to take a huge interest in banking and finance and ultimately led to the founding of the Bank of Dave.
I hear what you’re saying about a self-fulfilling prophecy that gloomy reporting could lead to reduced lending, leading to an economic slowdown.
However, I remember hearing a similar argument made at the start of the 2008 crisis that if only the media would stop talking about a crisis, we could avoid one.
Unfortunately, by the time it was being reported in the news, the damage was already done.
The situation was already way beyond sentiment as we learned what a mess had been made by those in charge of the banking sector and those who were supposed to oversee them.
The more complex the business model in banking, the riskier it is.
We only need to look back at the banks that either failed or would have failed without massive bailouts in the 2008 crisis. They all said they were in good financial health until they weren’t.
I remember hearing that even the boss and the chair of the failed banks didn’t understand the risks of some of the practices and complicated products they were dealing in.
Retail banking should follow a simple and safe business model; to take in money from savers and lend it out at a slightly higher rate, with the difference being the profit, which can then be used to fund the ongoing operation of the business.
The problems in the banking system began with this model falling out of fashion in favour of high-stakes investment banking or casino banking.
Many seem to have lost interest in their core function and also in their responsibilities to the people they should be there to serve.
Almost inevitably, it seems some of them might be in trouble once again.
The colossal amounts of financial support given to the banks should have only been given to them in return for an explicit promise to return to what they should be doing.
After all, the money used to bail out the banks was taxpayers’ money, our money. UK banks should be there to support the people, businesses and the economy as a whole in this country.
Banking should be about savings and loans, and not smoke and mirrors.
That said, we must consider that the current economic instability and challenging economic environment will inevitably lead to banks tightening their lending criteria.
UK banks should be there to support the people, businesses and the economy as a whole in this country.
Their main priority will tend to shift towards shoring up their balance sheets and warding off any suggestions that their finances aren’t entirely sound.
As we’re now seeing with Credit Suisse, any such suggestion can lead to spiralling costs to insure against default, which in turn, could jeopardise its financial stability.
It could potentially become a self-fulfilling prophecy which could have knock-on consequences for the global financial system.
You know your business better than anybody else does. A bank manager or accountant can look at the figures. Still, the statistics only go so far in giving an accurate picture of the health of the business and its prospects going forwards.
It should be easier to borrow against the property than against your stock or future income.
Most lenders will be more comfortable providing loans secured against property or vehicles, which are easier for them to quantify and value.
From their perspective, it’s less specific how much value they could realise from liquidating stock.
Property and vehicles, to a slightly lesser extent, are also more likely to be available to take possession of if a business fails.
You should find you will get the best available interest rate borrowing against these kind of assets with more conventional loans. This is particularly important right now, with rapidly rising interest rates.
Regarding alternative lenders, in my experience, the less conventional the means of financing, the more demanding the terms and the overall cost of borrowing tend to be. I would avoid this route in favour of continuing to self-fund.
Generally, net debt-to-EBITDA ratios of less than three are considered acceptable.
The lower the ratio, the higher the probability of the firm successfully paying off its debt.
Ratios higher than 3 or 4 serve as ‘red flags. However, your 2 x EBITDA as a term debt multiple should be acceptable for the bank without too much trouble.
I have a good friend Matthew who started with a hand full of staff and a small amount of money and has built his telecoms business into a billion-pound company today.
He grew organically first and then expanded by buying out the smaller competitors and refinancing those businesses to buy more.
Then In 2009, Matthew floated his company on the London Stock Exchange’s Alternative Investment Market (AIM). You could go down the same route in the future.
However, In the current climate, I would advise that you keep your borrowing to a minimum at the moment and carry as little debt as possible into the coming months, as the costs of servicing debt are likely to continue to rise until inflation is brought under control.
I have seen many excellent and profitable businesses go under just through cash flow problems and increasing their loans and debt just at the wrong time.
For the time being, I recommend that you stick with your original business model, growing your business organically from profits where possible. It seems to have served you well so far.
Now is not the time in the economic cycle to over-extend. The current borrowing facilities you have in place seem like a sensible approach to managing cash flow.
Some advice I give to businesses regularly who want to expand is… If you were to go away for ten years, which one of your competitor’s stock would you invest all your money in and why? That’s the one to keep your eye on and try and buy as soon as the world gets back to some form of normality.
There will definitely be easier times ahead when you can grow your business faster once again.
For now, focus on the fundamentals. Keep costs to a minimum and keep doing what you’ve been doing to see you through the coming downturn, without risking the tremendous growth you’ve achieved so far. Good Luck.
