Business Finance - Is hype becoming reality?
The media is currently a-buzz with recession rumours, inciting business worry. I don’t believe that recession looms – but economic swings don’t change the principles of effective financial management.
Small and entrepreneurial businesses are hit first by any downturn, an excellent motive for maintaining rock-solid banking relationships.
When recession surfaces, banks scrutinise the movement on corporate overdraft facilities to see whether any part of it has become hardcore.
Because overdrafts are usually repayable on demand, they can be a high-risk option for firms that don’t continue to dip in and out of the black.
Term loans represent a much better bet: they’re not repayable on demand and often can be interest-fixed. Financing via equity, where dividends don’t have to be paid, is even better; a combination of the lot should lead to a less risky form of finance. While small businesses are reluctant to release equity, it must be better to own 50% of something than 100% of nothing.
Banks have access to highly sophisticated customer data, including in-depth information on different sectors. Lending policy is based on this and the management’s assessment of sectors to support – and avoid.
Companies in weak sectors will obviously have to struggle to win support from their bankers. The best way to avert refusal is to arrange an early meeting with your bankers and offer quality management information allied with realistic forecasting and contingency plans.
Once a sector plunges and lending requests surge in, it’s much more difficult to raise funds. The simple solution? Rigorous business planning: review budgets and perform sensitivity analyses regularly. Talk to your bank and prepare in advance for any future financing requirements. While it’s tempting to ignore Inland Revenue and Customs demands, don’t let them drift.
Maintain acute ‘market sensors’. Be alert to change, new entrants, revitalised competitors and your market share.
Many small firms are overly dependent on one, or a small number, of customers – so remember there is strength in diversity.
Finally, relish the challenge of running an entrepreneurial business.
While the difficulties can seem insurmountable, nothing compares with the thrill of success.