Shaw & Co recently held a webinar for SME business owners, MDs, FDs and NEDs that provided insight into the traditional and alternative lending markets and how businesses can obtain the growth funding they really need.

Following are some highlights from the event which featured Brian Halford from Barclays UK, Oliver Jenkins from Shawbrook Bank, Will Whitt from Temple Bright LLP, and Alexei Garan from Shaw & Co.

Section 1 - The Process: How do you approach the funding markets?

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Alexei Garan, Shaw & Co: “Brian, with your experience of dealing with SME applications for funding, how do you know which SMEs are really ready for growth funding?”

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Brian Halford, Barclays: “For me it’s about team bandwidth. Growth is a lot different to BAU operations and can be all-encompassing. Do you have the right skill set and how are you going to split the time between the growth activity and BAU? Having a fully-formed plan is really important. Has it been tested? Do you have good contingency and mitigation plans or can you exit if things go really wrong? Finally, think about how you will fund it. Debt or equity?”

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Alexei Garan, Shaw & Co: “Oliver, assuming the SME is ready for funding, how do lenders view a competitive process, including brokered processes or those processes that are managed by specialist funding advisors like ourselves?”

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Oliver Jenkins, Shawbrook Bank: “I think in reality, an element of competition is inevitable because there are so many funders out there but I don't necessarily think it should influence the approach materially and it shouldn't really change what you put forward as a funding proposal. A competitive element might make you ‘sharpen your pencil’ a bit on the price, or be a bit more aggressive around the risk, but if you are already prepared to go to that point in the face of competition then you should be prepared to do that regardless if the business is backable.

“Also, if other lenders are putting terms forward then that actually that gives me a degree of comfort because another set of ‘grey matter’ has looked at it. They've asked the same questions and have made a conclusion. If it's a competitive process across ten funders and only one is prepared to offer terms then it raises questions.

“With regards to broker processes then the question is whether the broker really knows what the business is looking for. Is it the largest amount? Is it the quickest turnaround? Is it the cheapest price? As a funder you don’t always know that the broker has asked those questions. Plus, the broker will only get paid when the transaction is done so you should always question whether this is the right deal. Corporate finance advisers can offer greater market knowledge, enabling a SME to target specific funders rather than take a scatter gun approach. From a funder’s perspective, I also think it simplifies things a little bit as the advisor will already have acted as that first filter, which is particularly helpful.”

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Section 2 - Getting Your Funding Proposal Right: What are funders looking for?

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Alexei Garan, Shaw & Co: “Will, do you see a major difference in the deals which have had input from a corporate financial advisor and those that have not?”

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Will Whitt, Temple Bright LLP: “Absolutely we do. Good advisors are able to anticipate the key areas that a lender is going to want to look into. That ‘heads-up’ for a lender on those key areas of business can really help in terms of timescales. For example, with a manufacturing business we might be asked to look at the top ten sales contracts to see how they underpin cash flows in terms of how much notice needs to be given to terminate them, how long those contracts are going to be in place for (is it this year, next year, five years’ time), are there any rebates, or holdbacks within those contracts that might detract from the forecasted cash flows for instance?

“Good advisors can also help anticipate what a lender is going to want to look at in terms of risk and even how to mitigate it. For example, for one manufacturing company, 40% of their business was with the French MoD and they had terms of just 30 days’ notice which was quite a stark legal risk. Then we looked at it in context and they had a 20 year relationship and were in relatively safe position in terms of having few – if any - competitors who could realistically take their place.”

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Section 3 - The Pitfalls to Avoid: The classic mistakes in financial models that halt funding in its tracks.

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Alexei Garan, Shaw & Co: “Brian, what is the relative importance of financial models and forecasts?”

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Brian Halford, Barclays: “They’re certainly very important but it’s the team behind them that’s key. The ‘C Suite’ – CEO, CFO etc – and the second tier management team. Within that, experience is important, as well as who owns the key relationships. Also, do you have a good FD or accountant who can help with the numbers?”

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Alexei Garan, Shaw & Co: “Oliver, what are some of the pitfalls in financial models that SMEs need to avoid?”

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‍Oliver Jenkins, Shawbrook Bank: “I think first and foremost it needs to be in a readable and easy to understand format. A business will know their numbers and will have all the MI to hand whereas we are looking at it afresh. Sometimes, for example, we also ask for information and get it piecemeal with little explanation and we have to plough it.”

“A few basics we need to see are annual summary, a few years of historical data, the current trading year and forecasts. I know it’s snapshot but it gives you a good idea of the trends. Within that, a breakdown by month or by quarter as this helps us see significant movements. If information comes through in piecemeal format, is presented poorly etc then we have to take time to look through things and sometimes things can be initially missed – both good and bad. It also raises questions about the capabilities of the company’s financial team. If we are going to put a lot of debt into a business then we want to be able to easily monitor that debt and the performance of the company.”

“One important thing to remember is that we’re not just interested in profit and loss. It’s cash. I know it’s a cliché that cash is king but it couldn’t be more true - as the past few years have shown. And finally, please send us it in a spreadsheet and not a PDF. We need to be able to see the formulas and work with the numbers.”

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Section 4 - Getting the Deal Done: Due diligence and the legal hurdles.

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Alexei Garan, Shaw & Co: “Will, what problems have you seen in this stage of the process and how can they be avoided?”

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Will Whitt, Temple Bright LLP: “When lenders and businesses have agreed commercial terms they have already been through quite a process. Lawyers come in at the end when everyone is keen to get the deal done and often businesses, when they’re not familiar with the process, expect it all to be fairly mechanical – it’s just a case of printing off some documents ! However, the legal due diligence can enable the lender to really look under the hood of the business and get a lawyer’s view on any legal risks.

“One of the key pitfalls can be not getting third parties involved early enough – those that may need to provide further information such as insurance companies, outgoing lenders etc. You really need to factor this into the timeframe. For example, processing an outgoing lender may take over a week.

“Also, simple things such as ensuring that the right people are around to sign the final documents.  I had a deal once where we needed a signature from somebody in Chile. We thought they were in their office but they were on their farm three hours away so someone had to take the documents, drive three hours and get them all signed!”

Oliver Jenkins, Shawbrook Bank: “A sensible timeline is crucial and you need to build in contingency that takes account of all the various constituent activities. As lots of things are happening in parallel, you also need to consider the bandwidth of the management team.”

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To watch the complete webinar click the image below (viewing time 57 minutes).

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We work with growing UK SMEs and small-cap PLCs that have funding needs in excess of £2m and regularly approaching £100m. Our clients’ needs will typically be for sophisticated finance products such as cash flow based lending or private equity investments. Our value lies in helping clients access funding that relies on confidence in future trading and cash flows. For a confidential, independent, no obligation discussion on the funding options available click the 'Let's chat' button.