There are numerous types of debt and loan/banking products available in the market.
However, selecting and structuring the correct type of facilities to meet business needs and enhance business strategy is important to future business success.
1. The current business structure/position
It is important to understand the current trading position of the business and short/medium term funding requirements. The existing business structure will also be a factor when considering funding requirements.
Directors need to ask themselves whether the business is operating in the most efficient manner possible with assets being utilised to their optimal capacity. Implementing plans to improve operational and financial performance, including the sale of non-core assets may alter the actual debt or equity requirements that have been forecast from the strategic plan.
2. Strategic objectives/plan’s financial requirements
The strategic objectives/plan of the business will drive funding requirements and dictate the type of debt or equity funding required. Typically, we would recommend a business prepared a 3 to 5 year financial forecast (profit, funding & balance sheet projections) that supports the strategic plan being implemented.
There are a range of factors that will impact the finance able to be obtained including cost of obtaining and using the funds, asset security available, financial health of business, corporate structure, funding purpose and time period, industry factors, risk appetite and tax.
A review of the business will allow for the optimal financing options to be sourced given the current and projected state of the business.
3. Debt and equity financing options
Below is a summary of the types of debt and equity finance options available for a business:
- Asset finance facilities – Loan to purchase machinery, equipment or vehicles etc where the financier takes security over the underlying asset which is financed.
- Project financing – The facilities are provided to the business to finance a project. Common in property development/infrastructure projects.
- Trade financing – Facility types provide finance of stock and debtors of the business. This type of financing is designed for business that have short term liquidity issues as a result of timing differences between stock and debtor realisations/collections and trade creditors payment obligations.
- Business and working capital loans – This may include bank overdraft facilities, business loans or a line of credit which are all designed to be short term funding to meet working capital requirements. These type of facilities are generally at call facilities which are repayable on demand by the financier.
- Business term loans – Banks will also offer business term loans used for various reasons which require payments of principle and interest (or interest only) with the total amount owing for the facility to be repaid at the end of a fixed term. Financiers will generally take all present and after acquired property (“AllPAAP”) security interest over all the company assets and may require personal asset security of the Directors depending on the asset position of the company.
- Bank guarantee facility – Banks also provide facilities that allow a business to provide a deposit or bond to a supplier, vendor or landlord.
- Bond issuance – Larger organisations listed on a stock market may be able to issue bonds to investors. These bonds may also be able to be converted to equity at a point in time in the future.
- Existing or new shareholders – Further capital can be provided to the business in the form of a new share issuance or acquisition of existing shares.
- Private equity – Seeking investment from private equity can provide the business with much needed capital and management expertise.
- Share market – Raise further capital on the share market.