Tip 1 – Think of the bank like any other investor
One of the biggest mistakes people make is treating the bank like a supplier or services provider, rather than an investor. Debt is an investment tool in the same way as shares –shareholders receive dividends and capital growth from their investment and debt holders receive interest.
When you think about the capital structure of a company, lenders sit ahead of the shareholders; so as a shareholder, it makes sense that you keep them happy! Keep them in the loop, help them understand your vision for the business and engage with them in a structured way when you’re planning a big change or asking for capital.
Tip 2 – Think ahead and be prepared
Along the same line, when you are going to a new lender or seeking to change something with an existing lender, be prepared and have a game plan. Present your business case, have your own view about a reasonable outcome is and what your measure of success is.. Yes, lenders are tough negotiators, but ultimately it’s a negotiation like any other business agreement.
Tip 3 – Think outside the Big 4
There are more than four lenders in Australia. Yes, the big guys have access to the most and the lowest cost capital, but they are also generally focussed on winning big business. Smaller or specialist lenders generally make a little more effort to understand your business, its risks and opportunities, which can sometimes result in a better outcome.
Whilst it often isn’t seen as such, debt is always much cheaper than equity, so giving up a few points of margin on the interest rate, if it results in a good relationship and access to an appropriate amount of capital, is worth weighing up.
Tip 4 – Think about what you’re giving up
Nobody likes hearing the words ‘personal guarantee’…
Banks view a personal guarantee as a ‘why not’ piece of security; why would they not want a guarantee? Why, if you believe in the business, would you not be prepared to offer it?
There’s no easy answer or ‘one size fits all’ solution. However, if you’re required to give a personal guarantee make sure you understand it in detail, think about how your personal affairs are structured and what you want from the lender in exchange for your guarantee.
So let’s see how it all unfolds over 2014.
In our next edition, we will provide an overview of the different sources of equity capital, when and where they may be applicable and provide you tips on how to get the investment you want.
If you are thinking about expanding your business and seeking capital to help fund it, or feel like your current lender isn’t giving you enough support then give us a call on 1300 656 141 to see how we can help you.