With lenders getting fussier about to whom and and how much they're prepared to offer finance, setting out to secure a loan can be a daunting prospect. However, it needn't be, provided you do your homework
A bank, according to US poet Robert Frost, is an organisation that will lend you an umbrella in fair weather, and then ask for it back at the first sign of rain. The analogy may be simplistic and cynical, but for printers, it will certainly ring true, particularly in regard to the past few years.
The recession and subsequent faltering recovery have resulted in a huge fall in lending to print businesses. In part, this merely mirrors the general reduction in lending to business, but the shortfall in finance provision is particularly endemic in the print sector, where the majority of major high-street banks have long since lost interest in all but the top tier of clients.
In fairness to the banks, this has not been without justification; they have had their fingers burned, although they have only themselves to blame as those burnt digits were the result of crazy deals written in the run-up to the credit crunch that have come back to bite them.
"By 2002-2003, senior debt providers were coming back into the [print finance] market and putting in ridiculous multiples of cashflow," says Gerry Hoare, formerly of GE Capital and now managing director of asset-based lending broker Dealbureau. "Certainly HBOS Integrated Finance was lending money back then on supposedly asset-based terms that was purely a cashflow loan. There was no direct correlation that we [at GE] could see between the assets that they were using as collateral and the size of the loans that they were providing. So what you’ve seen in the past three years effectively is a reduction in that and a normalisation with the cashflow guys going away and saying ‘we’re not doing this anymore because we’ve lost a lot of money’."
However, while the high-street banks have pulled back, the likes of Close Asset Finance and its subsidiary Surrey Asset Finance, Societe General (SocGen), and Five Arrows Leasing (via its wholly-owned subsidiary Print Finance), have remained active in print, as have the finance brokers and M&A advisory firms whose living is derived from facilitating investment and growth at successful print businesses.
Right place, right time
These experts all agree that while access to finance remains difficult, it is possible to find, provided businesses are properly prepared and approach the right institution at the right time with the right information. This advice could make the difference between getting a loan approved and chasing around for months with no real prospect of success.
Mark Nelson of Compass Business Finance says that the number-one tip he would give to printers looking to finance an investment would be to have a clearly thought out rationale for the purchase. "The rationale is a base reason as to why the printer wants to spend this money and how it will benefit the business going forward," he explains. "The lender will be keen to see one of the following: a new contract secured; current work being outsourced that the investment will bring in-house; greater production efficiencies that offer a payback on the investment over a realistic term; or strong opportunities in the market that can be exploited."
Equipping yourself with this kind of rationale will help convince a prospective funder that the deal is worthwhile, although they will still want to see a solid business plan as well. "You should demonstrate the ability to repay with a cashflow forecast for the next three years," says Close Print Finance director David Bunker. "This is a self-help exercise as it can show the strengths or weaknesses with an investment. Stress testing this can also show what would need to be done if receipts of payments were delayed or if creditors squeezed payment terms. Once satisfied the investment is sound, this cashflow forecast along with a budget, P&L and balance sheet can be given to lenders with the corresponding assumptions."
Equally important is that management information is current, including last audited or draft accounts, management accounts to the most recent date possible, aged debtors and creditors, together with bank statements going back three months. "Bank statements show a snapshot of the cash availability of the business – and cash is king," says Nelson. "If there’s an invoice finance facility, a statement for this, for the same time period, will also be needed."
"You should also consider the scale of the investment," says Bunker. "Will a stepped investment programme present a better proposition? Failing that, spreading the investment between finance houses may relieve some of the pressure of just going to one finance house."
Bunker adds that a good rule of thumb is not to be exposed to a single client for more than 15% of sales, for instance, as banks will want to see a good customer spread, while printers should also be prepared to provide collateral security if the expected cash deposit is not available.
A schedule of all finance commitments is a likely requirement as it shows how the monthly cashflow of the business will be impacted and allows a finance company to see how long until another major monthly repayment finishes. For a finance broker, this is likely to be the first point of call. "I normally sit down with an asset register and see how much finance is outstanding and then do the numbers to say, right, we could refinance this and release some equity from what you’ve got there and reinvest that," says Hoare. "The only time you wouldn’t refinance is if the asset has been recently acquired and the finance has got a long time to go and to repay it would be detrimental in terms of penalties."
While asset-based lenders remain the number-one source of finance for print businesses, whether that be against invoices or plant and machinery, for larger deals including mergers and acquisitions, senior debt providers will be needed and this is where the big banks are still involved. "I think you can still raise senior debt to do a transaction," says Nicholas Mockett, partner at Moorgate Capital. "Debt markets are still difficult in general, but if you’ve got a good quality business plan and good quality of earnings it’s still possible. If it’s a deal of any shape and size then it would be a good first port of call."
"Some of the big players in the print industry won’t touch asset finance and part of the reason for that is that it tends to encourage people to chase turnover rather than profit."
Again, cash, or rather cashflow, is king. "The things a senior debt provider is going to be looking at relate to quality of earnings; so, what is your cashflow and how predictable it is," explains Mockett. "If you’ve got lots of long-term contracts and you’re equipment base is of a decent quality that will last you for a period of time, probably at least as long as those contracts, then you’re going to be providing that kind of information rather than a valuation of what an individual asset might be worth in the secondhand market in a distressed sale."
Spend money to make money
If you’re looking to acquire another business, then the debt provider is going to want to know what the cashflow forecast is for both businesses, as well as the cashflow benefits of the acquisition. "Everything tends to be down to cashflow implications, so if you’re going to be buying a business and you expect some synergies, you’re going to have to spend some money to realise those, for instance, by consolidating two sites into one," says Mockett. "So, you might be able to get repayment holidays while you do that and you might be able to pay interest only for a period and then have bullet payments after, say, a couple of years. If you were using PE as well to help fund the transaction then that three-year timeframe could coincide with the point at which they’d be seeking to exit or you might look to refinance at that stage."
Mockett adds that business owners shouldn’t be put off approaching senior lenders to finance the purchase of a distressed company. "A business might be in administration for very good reasons – it doesn’t necessarily mean that the business can’t make money," he says. "It might be that somebody over-invested at the wrong time and they can’t support that level of indebtedness, but if you take that indebtedness away then the business can be viable and as long as you have a viable plan and quality earnings, then that could be backable."
According to Hoare, one alternative to both asset-based lending and senior debt is mezzanine finance, which is effectively cashflow lending. While it will almost certainly be more expensive than senior debt, Hoare argues that it can provide a greater amount of cash. "It’s a halfway house between private equity and senior debt," says Hoare. "They will go into the financial performance of the business, the cash generation, the overall management of the business and take a longer-term view, because they’ll want a slice of the upside if the business is successful." Although mezzanine finance remains quite niche as far as the print industry goes, it is growing fairly quickly because there is a gap in the market. "It’s generally specialist funds that raise money through the markets, through pension funds and various institutions, a bit like private equity – they raise a fund, they put the fund out and then they go and raise another fund," says Hoare. "But interest rates on there are going to be anywhere between 12% and 25%, so it’s expensive and obviously you’ve given away an element of equity, but if it means you can go away and make acquisitions or invest in the business in other ways then that’s a good thing.
"I think once economic growth gets back to what it was in the early 2000s, mezzanine will start to reduce again and people will start to go back to traditional banking, overdrafts and cashflow lending, but in the short-term mezzanine will be there. For companies that want to try to have accelerated growth quicker, even when things normalise, mezzanine will be there because senior debt’s never going to quite get back to the levels we saw in the past just by virtue of the lessons that have been learned."
The common theme in this is to seek expert advice and plan ahead. Hoare advises thinking about your business needs for up to two years in advance, in order to give yourself the best chance of success. It is easy to underestimate how long it can take to get in front of the right people to lend to your business and speaking to someone who knows which lenders will be able to help can save valuable management time as well as increasing your chances of success.
TOP TIPS FOR SECURING FINANCE
• Give a rationale for the purchase and back it up with current management information
• Demonstrate the ability to repay with a cashflow forecast for the next three years
• Consider the scale of the investment and how best to spread it
• Be prepared to provide collateral security if the expected cash deposit is not available
• Consider alternatives to asset-based lending such as mezzanine finance or senior debt
• Seek expert advice from finance professionals and be realistic about timescales
CASE STUDY AMETHYST MAILING
Amethyst Mailing recently completed a £170,000 investment in the purchase and installation of a new five-colour Heidelberg SM 74. The Worthing, West Sussex-based mailing house decided to invest about two years ago because of the amount of print work it was having to outsource. "We were acting as a broker for no benefit," says managing director John Rowling. "We would win all the mailing work, but we’d have this huge cost that was doing us no favours whatsoever."
By investing in the right kit to bring this print in-house, Rowling was confident that this cost could be turned into a profit centre within Amethyst’s existing core business. "We had the space and we had the operator already, therefore our only additional cost would be paper and electricity. So it was a fairly simple sum to do," says Rowling.
Amethyst originally planned to buy a KBA Karat digital offset press, but consultation with clients on their future needs led Rowling to switch to the Speedmaster, which he says highlights the importance of research in investment decisions.
Research also played a crucial part in the finance process, as Rowling found he was initially beset by firms that didn’t understand the industry and were either just looking to make their own money off the deal or were not interested in lending. "We went through several discussions and several people. Being a smaller company with a rocky five years growth, we didn’t have the strongest balance sheet in the world, but we had moved from losses progressively into profit in that five years and with an increasing strength," says Rowling. "Some of them took the view that that was fine, with a personal guarantee, some flatly turned us down because they didn’t think we were strong enough, others said they could place the deal but there would be a finder’s fee of whatever percentage and we may have had to pay higher interest."
Eventually Amethyst stumbled on specialist print finance brokers Compass Business Finance, who Rowling says were "like a breath of fresh air. Not only did they know the industry but they were able to look at the package required and do it in a way that made sense. So instead of just a big chunky deal against the machine – we were looking at a structured package against the equipment that we totally owned, using that as a deposit asset and funding the balance."
This structured deal was cheaper in terms of interest and overall payments and was less onerous in terms of the personal guarantee required. Rowling’s advice to any other SMEs looking to invest is to research finance providers as thoroughly as you research the kit. "Do your homework," he says. "Be prepared to talk to people and investigate every angle because you don’t quite know what’s available or who’s available until you start doing it."