Royal Commission Into Misconduct In The Banking, Superannuation And Financial Services Industry
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Words which perhaps invoke a sense of nervousness in the likes of bankers or mortgage brokers and potentially heightened confusion in SME businesses.
It would not be unreasonable to say that in recent months, there has been a visible tightening in lending practices among the Big 4 Banks. The reality is that lending guidelines and criteria, which may or may not have been strictly adhered to previously, will now be very closely monitored. SME businesses without collateral to offer as security are likely to find it increasingly difficult to source financing at affordable rates.
Further, NAB’s decision in March 2019 to extend the Code of Banking Practice to small businesses with less than $5 million in total borrowings is likely to see even more stringent reviews of applicants, particularly if it is adopted by other banks as well. The likely result is that lenders, without collateral and the ability to enforce certain covenants, will essentially be asked to consider cash flow lending. Understandably, this is a high-risk proposition which will likely result in even more scrutiny into applicants.
So, as an SME business in a lenders’ market, how do you grow? At PKF, we are focusing our SME clients on understanding and bedding down the foundations of their core business as growth must be a careful journey.
Our focus areas:
A dynamic forecast integrated into Business as Usual (BAU) is essential to the success and growth of any business. A forecast must incorporate lessons learned from historical trading, the impact of operational levers and be iterative and reflective of reality. A forecast must not be a set and forget exercise. After all, a cash flow forecast is essential to understanding the levers and value of any business.
A robust forecast will allow you to articulate your strategy and growth trajectory to a lender. It will help you communicate your understanding of the market, the impact of seasonality and the levers available to the business. It is also important to highlight the stability of your forecast, for example, through revenue secured via long term customer contracts.
- Working capital
Could a better understanding of your working capital levers increase your ability to release cash into your business? Absolutely. Therefore, businesses must invest time to understand and articulate their cash conversion cycle.
Be sure to take the time to assess the best working capital funding solution for your business based on your cash conversion cycle. For example, is a standard facility sufficient? Or is a bespoke facility required? Or is a credit card sufficient?
- Explore your strategies for growth
There are many options to grow your business. Organic growth might require you to focus on releasing cash from your business while inorganic growth will require careful analysis of your investment partner be it a trade partner, private equity, joint venture etc. Due diligence and options analysis may help you identify the right path for your business.