It will be of no surprise that when there is turmoil in the economy and markets, with high inflation, higher interest rates and pressures on consumer spending as well as a cost of living crisis, that the funding markets start to consider this in their appetite for funding businesses.
At Snowball we are in the fortunate position that we work right across both the debt and the equity markets, and see the impact on all types of funding, and all types of funder, across the funding spectrum. We work with both trading businesses and property developers and investors.
As we are completely independent, it means we have access to hundreds of debt funders and equity providers (more than 550), and therefore we see the impact, and changes in appetite across all the debt and equity funders who support business lending.
Debt Markets
Clearly the first thing to say is that unless all your borrowing is on fixed rates then borrowing money is now more expensive. Base rate has increased from 0.25% to 3.5% (as at 15/12/22). If the anticipated market rates are to be believed this rate could start with a 5% at some point next year, but naturally a lot can happen before then, both good and bad!
Base Rate Considerations
It should also be remembered that whilst most funders use the Bank of England base rate as their benchmark, some funders have their own, for example, Handelsbanken in the UK. Their base rate is 0.5% higher than the Bank of England one, so something to be aware of.
This means higher interest costs and debt repayments on your borrowing that need to be paid, and depending on the amount of debt you have, this may cause a major issue for the cashflow in your business. There is of course the physical cost of repayments but also there may be financial covenants in your funding agreements and increased interest and repayments will impact these too.
Lender Considerations
The same is true for the lenders; their cost of money is now higher and they will be looking to pass those costs on, and depending where they source their funding from, this may even impact their own funding lines and the appetite of who funds them. The other side for the lenders is that they need to consider their lending portfolio and consider what the implications are with further interest rate increases and check their customers can still keep their repayments up. Some form of stress testing will take place on rates and for the property lenders they may start to stress test what would happen if there is a fall in residential property prices across the board.
Changes we have seen
Personally, so far, we’ve seen limited changes from the debt market occurring, those being:
- Additional stress testing on potentially higher interest rates to ensure repayments can continue to be made if rates are higher.
- Some of the higher loan to value property offers have been removed.
- Closer monitoring of management accounts and covenants by the funders.
- Many sectors are now considered ‘amber’ by lenders rather than ‘green’ and some have moved to ‘red’ – every lender is slightly different but some funders are more selective against businesses in certain sectors such as hospitality.
- Funders are taking longer to make decisions as they look more closely at deals and want to see more due diligence.
Equity Markets
It has long been known that there is a lot of available cash out there in the investment/equity world. Often called ‘dry powder’ this is the cash committed but not yet called upon to be invested, and globally this is a huge figure around $1.2 trillion across private equity alone.
This creates opportunity but also pressure because this money therefore needs to be invested to be put to work, but of course it needs to be invested well, so the money is not just shovelled out of the door into just hitting deal numbers!
Government Schemes – SEIS and EIS
There are also the government backed tax schemes such as SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) which both offer considerable tax benefits to individuals or SEIS or EIS funds who invest in higher risk companies looking for growth. There are also VCTs (Venture Capital Trusts) who invest in VCT qualifying companies for growth. These act a bit like SEIS/EIS Funds and offer tax benefits to those that invest in them.
These schemes work for both investors and the companies they invest in, and remains a strong sector, which is always looking for good deals to invest in. The tax benefits are there to protect an element of the investment because of the higher risk nature of the investment, and this has not changed. There will always be businesses that thrive and others that struggle and those with higher risks than others, but these have the potential to bring higher returns.
Changes we have seen
Overall, at this moment, we have not seen any major changes in equity appetite. But where we have seen some changes, they are:
- The time process has slowed down – deals are taking longer to go through the whole process.
- More due diligence required – funders and investors are asking for more information to assess each deal and want to see more financial scenarios.
- Number of deals completing has reduced – this is mainly impacting the number of very large deals ($100m+)
- Valuations in tech sector have come down – there have been some ridiculous valuations out there, so I don’t see this is a bad thing. The peak came and went (until of course the next tech peak comes again!!)
- Crowdfunding pre-funding has increased – the two major crowdfunding platforms, Crowdcube and SEEDRS always require businesses to have raised/have committed a certain percentage of the overall target they are looking for before they go fully live on the platform. The percentages for both platforms has increased quite a bit so more pre-commitment is required before going live.
- Normal ‘boring’ businesses are seeing a resurgence – often this type of business gets less of a look in due to the ‘tech hype’ or the latest ‘big thing’ such as food delivery or subscription business. This has changed.
It is of course early days and appetite can change as circumstances do, but at the moment there is still strong appetite for both debt and equity for good businesses. We continue to act for businesses in many different sectors raising both debt and/or equity and we see no reason at the moment for clients not to continue on their funding journey.
What can you do as a business?
There are a number of actions you can take during these more turbulent times and are relevant whether you already have debt or equity raised, are going through the process, or have no plans to raise anything at this time:
Be Aware!
The first thing to be do is to be aware of all the issues going on and how it may impact you, your staff, your clients, your funders and your funding lines and/or your investors
Be Wary!
Generally, just be more wary. When your clients take longer to pay or ask for extended credit terms, look into the situation more closely. Don’t just assume a business that was successful in the past, still is – they may have cashflow issues, or there may be a genuine reason. A potentially large new contract may look great on paper, but if they don’t pay, it could have major implications for you.
Warren Buffett, the legendary investor, and where the name ‘Snowball’ comes from is attributed to the quote ‘Only when the tide goes out, do you discover who’s been swimming naked’ – wise words!!
Communicate
Communicate with all parties more often during difficult times. This is true internally with your team members and staff who may have their own concerns, as well as externally with customers, suppliers, investors and funders.
Measure
If you have covenants in place that link to your funding lines, then measure them before the funder does so that you know if you are likely to breach them or not. It is always better to know and then approach your funder with a plan, rather than be told by your funder that you are in breach. Links back to communication again too.
Plan
Plan different financial scenarios to look at the impact on your business and continually revise them. Whilst these can be very in-depth plans looking at profit and loss, cashflow and balance sheets, these can also be pretty basic looking at the impact of certain scenarios and assumptions. It is always best to have an understanding of how the numbers may look over the coming months and very much links to:
Cash is King
If you always have cash then generally you always going to be in a fairly good place. Every business should operate a cashflow forecast. Depending on what the plans say and how tight cash may become, the cashflow forecast may be a monthly or even a quarterly forecast, but if things are tight, this should be down to weekly and sometimes even daily numbers. Every business should always be able to forecast out their cashflows for the next 3-6 months and include all upcoming monies in and out. If the forecast shows a major issue in 3 months time, you then have the time to take action now to prevent that being the case, rather than finding out in 2 ½ months time, when you have limited options available.
Look for Opportunities
When there are downturns and recessions, there are always still opportunities for new businesses, new ideas, acquisitions as well as distress purchases for those with the ability to complete deals and have the cash or funding available.
Seek Assistance
You may not have been through situations like this before or you may have concerns over how to plan and forecast or consider what the implications could be on your funding. Do you need additional funding? Can you raise additional funding? If you had the opportunity to do XYZ then could you raise debt or equity to accommodate this. You know that you will breach the covenants in your lending facilities – what should you do?
Snowball Can Help
We can help with all of these things and more. We at Snowball can help with the following:
- Strategic advice and a sounding board for entrepreneurs
- Monthly ‘board type’ meetings to discuss strategic, commercial and financial matters
- Help to plan and forecast (assumptions/profit and loss/cashflows/balance sheets)
- Help manage relationships with funders if there are issues or matters that need explaining and/or negotiating
- Advise on funding strategy and the ability of the business to raise finance
- Produce funding proposals and investment memorandum to raise debt or equity
- Source and raise debt and/or equity for businesses from the 550 providers we work with
If you wish to have an initial discussion with us on any of these aspects, please contact us and we will arrange a free initial consultation.