1. Finding Capital In Difficult Times
Steve Solomon MBA FCIB DIP(FS)
Senior Commercial Director
RBS PLC
Central London Region
280 Bishopsgate
The contents of this presentation do not purport to provide any financial, investment or professional
advice and nothing on the pages of this presentation shall be deemed to constitute the offer or provision
of financial, investment or other professional advice in any way.
3. Agenda
• Introduction
• Cash flow – What does the picture look like?
• Cash flow strategy
• Debtors & Creditors
• Understanding your cash flow cycle
• Stock
• So what are the Cash management financial tools available & their use
• Debt V Equity
• Financial Risk Management strategies
• Summary
• Questions & Answers
4. The greatest influences on deterioration in cash flow position
Source Ipsos MORI
0% 5% 10% 15% 20% 25% 30% 35% 40%
Customer taking longer
to pay
Fall in new business
Rising input prices
Having to cut prices
Increase in amount of
bad debt
Increased cost of
finance
Credit insurance being
declined
5. Do you have a Cash Flow Strategy in place?
• Ipsos Mori study undertaken in March 2009 of a cross section of leaders of SME’s defined as
having a turnover of between £250,000 & £25m
• 61% interviewed say their cash flow positions has deteriorated
• 78% said their cash flow was good enough to see them through the next 6 months
• 10% had serious concerns
• 29% have taken no action with respect to cash flow
• 44% have introduced one specific measure to improve cash flow
• 20% have put in place a multi-action strategy
• 7% don’t know, or gave no answer
• Most common actions were “defensive” measures with respect to how they deal with
customers, including more active debt chasing, asking for payment up front, and an
increased use of credit checking. Others included cost cutting, some companies had gone
on the offensive taking up the opportunity to market more aggressively in the hope of
picking up market share.
6. Your in house credit control
• Debtors
• What systems do you employ to check out the financial strength of your customers?
Increased used of credit checks is vital
• Have you revised/renegotiated your terms of trade?
• Why give customers credit?
• If so have you reduced the credit terms available?
• Consider offering a cash discount for payment up front 90% cash is always better than 100%
of an unpaid invoice
• Do you immediately take/threaten legal action on bad debts
• Do you charge late payment penalties
• Creditors
• What terms of trade can you negotiate?
• Will you receive discounts for cash purchases or prompt payment
• Your In house credit controller/team can be one of the best assets your business has, how
much do you rely on them, and what risk would there be to your business if you lost them?
7. Cash flow Cycle
• Do you have a cash flow forecast, if so how often is it updated?
• How do you track your cash flow v projections?
• In some sectors managing the cash flow cycle can eliminate/reduce the need for borrowing any money
• If you Purchased goods for say £100,000 with 30 days credit given
• & you sell them immediately for cash/cheque for £125,000
• Your cash flow will have an injection of £125,000 until the date you need to pay your supplier
Days 0 10 20 30 35
Cash in 125000
Cash Out -100000
Positive Cash Cycle 125000 125000 125000 125000 25000
The key benefit here is that you are using the cash flow cycle to reduce your own working capital requirements
8. Stock
• Does your business need to carry stock?
• Can you introduce a just in time policy?
• Can your product be shipped direct from the manufacturer to your customer?
• What controls do you have in place for ordering stock, do your people understand the
impact carrying large amounts of stock will have on your cash flow?
• Do you have retention of title clause in your invoices?
• How often does your stock turnover, and how accurately do you measure your stock turn?
9. The cash management Instruments commonly available
• Asset Finance
• Invoice Finance
• Commercial Loans
• Enterprise Finance Guarantee Scheme
• European Investment Bank Scheme
• Debenture Lending
• Overdraft Facilities
• Company Cards
• Structured Debt Solutions
• Venture Capital & Equity Finance
• Directors Injection
• Capital Instruments - Hedging
10. Use of cash management financial tools
0% 10% 20% 30% 40% 50% 60%
Overdraft Facility
Credit Cards
Secured Loans
Vehicle Leasing
Unsecured Loans
Invoice discounting
Long term high interest deposits
Loans from directors/shareholders
Factoring
Asset Finance
Sale and leaseback
Technology leasing
Source Ipsos MORI
11. Asset Finance
• Cash flow for your business - leasing helps preserve cash needed to support your working
capital requirements.
• The asset finance company takes the risk, not you – they take future asset risk on a variety
of asset categories, protecting you from falling values.
• Known, fixed costs - better for budgeting and no surprises for your cash flow.
• No depreciation worries - certain asset finance methods remove the risk of depreciation.
• Smarter working capital - leasing allows you to use your capital in areas that add value to
your business.
• Various options – Contract Hire, Finance Lease, Operating lease, sale & leaseback
(increasingly popular), car & van finance
• Both Asset & invoice finance are merely a refinement of debenture lending principles
12. Invoice Finance
• Debt factoring. Invoice factoring, invoice discounting, asset based lending. The theme
remains the same: Invoice finance companies turn your unpaid invoices, inventory or assets
into cash – which you can put to work immediately.
• With factoring, the invoice finance company process payments and deal directly with the
clients who owe you money.
• With Confidential invoice discounting your business would have to perform all these
functions. Factoring is an added-value service that is particularly useful for companies that
don’t want to bring these functions in house.
• They are separate from other funding streams, opening up a whole new line of credit. Plus
there is the potential to release security such as personal or company assets – removing
some of the stress of running a business. Both options also allow you to have protection
against bad debts
• They can improve cash flow turning Debtors into cash up to a maximum of 90%
• This could help you fund an acquisition without the need for personal security – or simply
facilitate a deal that would otherwise prove impossible. It could also provide the day-to-day
funds you need in order to buy raw materials or pay wages
• They can also help you trade overseas & collect debts
• If you are thinking of a management buy-out or management buy-in Invoice finance can
often use the sales ledger to help raise the funds you need, often avoiding the need for
personal security or external funding
13. Commercial Loans
• Suitable if you are looking to expand your premises, build new premises or fund a property
purchase.
• Interest rate options - choose from fixed and variable interest rates
• Up to 25 year repayment terms - giving you the flexibility you need
• £26,000 minimum loan amount - and no maximum loan amount
• Borrow up to 70%-80% of the purchase price - or of the open market value, whichever is
lower
• Pay interest on what you need - staged drawdown options allow you to withdraw funds as
and when you need them, reducing the amount of interest you pay
• Sale & leaseback increasingly seen as a way to manage property estate
• Flexible repayment options
• Help your cash flow with a capital repayment holiday
• Capital and interest repayment holiday option.
• Make lump sum reductions to save on the interest you pay.
• Increasingly linked to Libor rather than base rate
14. Enterprise Finance Guarantee Scheme
• Under this scheme, the UK Department for Business Enterprise & Regulatory Reform
(BERR), will guarantee 75% of your loan - which means you don't need a large amount of
security to back your borrowing. The bank will take a Personal Guarantee for the 25%
• Enterprise Finance Guarantee benefits
• Variable or fixed interest rates - giving you the choice you need available for businesses
turning over up to £25m
• £1,000,000 maximum loan - the minimum amount is £1,000 (£26,000 for Fixed Rate Loans)
• 3 month minimum term - and a maximum term of 10 years
• Drawdown options to suit your business - you can receive your funds in stages, to suit the
cycles of your business
• Payment holidays - you can ask for a capital repayment holiday of up to three years. During
the holiday period, interest will continue to accrue and be applied quarterly. You will be
required to lodge funds to meet interest applications during the agreed capital holiday
period
• If you qualify for the BERR guarantee and take a loan under the Enterprise Finance
Guarantee scheme, you need to pay a premium to BERR. Paid quarterly to aid cashflow, the
premium is based on 2% per annum on the reducing loan balance
15. European Investment Bank Loans
• A number of the Uk Banks have entered into an agreement with the European Investment Bank, which
enables them to offer a preferential price to qualifying customers who are seeking loan finance for an
eligible purpose.
• For a limited time, they are able to offer a discount from their usual pricing for Business Term Loan
borrowing.
• Key scheme criteria are:
• Loan amounts £26,000 to £500,000 (although higher amounts can be considered)
• Loan term of between 2 – 25 years
• Discount of 0.6% of negotiated Interest rate terms
• Funds can be used for many purposes, including asset purchase, permanent increases to working capital,
or research & development costs.
• Applicants must not employ more than 250 employees, and be considered autonomous/independent of
parent companies
• Loans can be granted to businesses in most sectors (except those associated with property development
for sale, property investment, the purchase of farm land, weapons & ammunition, gambling & related
equipment, tobacco-related businesses, use of live animals for scientific purposes, or any business which
is considered morally or ethically controversial)
• Borrowers must also agree that (a) upon reasonable notice they will permit representatives of the EIB to
inspect all sites, installations and works that comprise the project which is the subject of the loan; and (b)
following a request by the EIB, we may give any information about the Facility, Project or Borrower to the
European Investment Bank.
• Loans are subject to status and the decision to lend rests with the Bank. The EIB is unable to intervene in
any matter regarding the Bank’s credit assessment of an applicant.
16. Overdraft Facilities
• Provided for working capital facilities & for any amount, however expensive for banks to
provide if customers do not utilise facilities, as they have to put capital aside to cover the
obligation .
• They are flexible – you can agree an overdraft for any period up to one year. Facilities tend
to be committed & are no longer “repayable on demand”
• Interest calculated daily - the variable interest rate is linked to base rate. Interest is charged
to your account quarterly.
• Currency options - arrange your overdraft in a variety of currencies.
• Annual fee at outset & upon renewal.
• Pricing will vary depending upon the financial performance of your business, a lot of uk
banks have a price promise in place for existing customers so that the terms will not be
revised upwards unless the risk significantly increases.
• Facilities can be secured or unsecured & Banks will increasingly look to tie in Directors of
limited companies at the very least with a personal guarantee to support the overdraft
facility.
17. Company Credit Cards
• A company credit card can be crucial to your business purchasing and expense
management arrangements & manage your cash flow & control expenditure
• Most card co’s can integrate with your finance systems through with 24/7 access to
transaction data, & allows you to streamline your expense management processes,
potentially saving you time and resource.
• You can monitor and track how much employees spend, on what and where. Additionally
you can control cardholder and transaction limits, and apply merchant category group
blocking, allowing you to more effectively control expenditure.
• You can use a company card to manage the peaks and troughs of cash flow. Suppliers can
be paid in three to four days, while you can enjoy an interest-free credit period of up to 38
days.
• As your business grows, company credit cards can grow too. It’s easy to issue cards to
other employees.
18. Directors/Shareholders Injection
• One of the easiest ways to raise finance can often be through Directors/shareholders
themselves injecting funds direct into the business by loan.
• Another key way to grow the business rapidly is to retain the profits within the business &
then place these funds on short/medium & long term deposit accounts. Very difficult with
base rates so low to generate a healthy return
• Companies that do not take out all the profits, grow much faster, are able to withstand
changes in the economy & their marketplace, can take advantage of opportunities that arise
quickly
• Can generate significant discounts by paying cash up front
• Take advantage of opportunities to buy stock in larger quantities
• Build a strong credit profile that enables them to have extended credit terms, in effect
creating a virtuous circle
22. • A Limited were a Joint Venture with a French telecoms
company, but the principal management also had over 20 years
experience in the mobile phone market
• A Limited were principal suppliers and installers of mobile
phone car kits to Corporate clients such as 02 and T-Mobile
• The business banked with Barclays and HBoS were also in the
picture
• A credible management team with 25% of the equity were
introduced to us by a trusted accountant to provide finance to
support their bid of £2.1m for the assets and goodwill of the
business.
• They could raise £750k contribution but there was also a
substantial working capital requirement
So the story begins…
23. • MBO team wanted to raise up to £2m debt facility to purchase the 75% majority
stake, with historical results showing
2006 2007 2008
Turnover 5,892k 5,605k 5,955k
Gross Profit 2,198k 2,013k 2,798k
EBIT 772k 820k 1020k
• Operating model for the business was changing with less car kit business and
a change to telecom related solutions including installing state of the art
equipment in the nation’s ambulance fleet.
• Management had ascertained that underlying EBIT for 2009 would decrease to
£979k as a result of challenging trading conditions.
• EBIT of £1.2m had been forecast for 2010 and considered stretching yet
achievable by external due diligence
What they needed to borrow…
24. Funding explained
• Deal Requirements:
• Purchase Price £2,100k
• Working Capital £500k
• Deal Costs £100k
• Total £2,700k
• Suggested Funding:
• Management Equity £ 750k (28%)
• Term Loan £ 1,200k (44%)
• Invoice Finance £ 750k (28%)
• Total £2,700k
Recent trading and the changing market saw the bank assess the management
equity at 28% as a little light and this was bolstered by a PG of £400k
Total Debt to 2008 EBIT 1.9 times
Current term for repayment geared to 4 years & working on 2 x EBITDA
25. Structured Debts solutions approach
• The Bank liked the business – strong growthgrowth potential, stablestable operating model,
impressive management plus a diversifying and growing customer base
• Profitability spread across 4 major income streams and they were embedded
with those clients
• The Bank remained concerned about client concentration but tailored our deal
to the visibility of future earnings
• The Bank clarified that the ambulance contract would extend for 3 years and
the 02 contract would get a two year extension
• The Bank presented to the clients exactly how we would deal with the various
stages of the transaction
26. Venture Capital & Equity Finance
• Venture capital is a type of private equity capital typically provided to early-stage, high-
potential, growth companies in the interest of generating a return through an eventual
realization event such as an IPO or trade sale of the company.
• Venture capital investments are generally made as cash in exchange for shares in the
invested company. It is typical for venture capital investors to identify and back companies
in high technology industries such as biotechnology and ICT (information and
communication technology) & Internet start ups.
• Venture capital is most attractive for new companies with limited operating history that are
too small to raise capital in the public markets and are too immature to secure a bank loan or
complete a debt offering.
• In exchange for the high risk that venture capitalists assume by investing in smaller and less
mature companies, venture capitalists usually get significant control over company
decisions, in addition to a significant portion of the company's ownership (and consequently
value).
• Because investments are illiquid and require 3-7 years to harvest, venture capitalists take an
active interest in their investment to increase the likelihood of reaching an IPO stage when
valuations are favourable.
27. Venture Capital & Equity Finance
• Venture capitalists typically assist at four stages in the company's development:
• Idea generation;
• Start-up;
• Ramp up; and
• Exit
• There are typically six stages of financing offered in Venture Capital, that roughly correspond to these
stages of a company's development.
• Seed Money: Low level financing needed to prove a new idea (Often provided by "angel investors")
• Start-up: Early stage firms that need funding for expenses associated with marketing and product
development
• First-Round: Early sales and manufacturing funds
• Second-Round: Working capital for early stage companies that are selling product, but not yet turning a
profit
• Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company
• Fourth-Round: Also called bridge financing, 4th round is intended to finance the "going public" process
28. Capital for Enterprise Fund
• £75m Capital for Enterprise Fund which consists of £50m from the Government and £25m
from RBS, Barclays, HSBC, & Lloyds
• The Fund will invest in fundamentally sound UK based SME’s with existing cashflows and
genuine Growth potential. But which are currently over geared or unable to access the
funding they need. The fund will offer between £200k & £2m of equity or mezzanine finance
• Principle place of business in the UK
• Meet the EU definition of an SME:-
• Small and medium sized business
• Headcount less than 250
• Turnover or balance sheet total less than 50m Euro’s or equivalent
29. SME Leaders with financial risk management strategies
1%
25%
74%
Source Ipsos MORI
Yes
Yes
Yes
No
30. Common elements of financial risk management strategies
0% 10% 20% 30% 40% 50% 60%
Agreeing fixed rate loans
Agreeing minimum and maximum rates on
loans
Agreeing maximum rates on variable loans
Forward buying of foreign exchange
Credit insurance
Foreign exchange hedging
Time options on foreign exchange
Source Ipsos MORI
31. Summary
• 59% of SME’s have a cash management strategy in place
• 47% say that the interest they receive on deposits is important in managing their cash flow
• 25% have a financial risk management strategy in place
• Which category are you in?
• Consider the introduction of a formal financial risk management strategy & have your
brightest & best people report back to the main board monthly
• Look at short term, medium term & longer term financing options, incorporate this into your
1, 3 & 5 year strategic plan
Data source Ipsos MORI
32. Summary
• Consider hedging or exchange rate tools to increase certainty in costs or revenue streams
• Continue to increase your knowledge of financial tools that can help your business, attend
bank presentations to increase knowledge & understanding.
• Meet with your Bank every quarter to discuss your plans and how they can help you achieve
them
• The character & ability of the management team is key to unlocking bank funding, not just
good financial performance
• The Bank’s do want to help you be successful, our door is wide open & we are happy to
discuss confidentially with any company their current funding, & opportunities they would
like to pursue.
• Understand fully the terms you are entering & agreeing to, the costs, the term of the facility, ,
early redemption penalties, the covenants & the impact on your business if interest rates
move up and the impact on your cash flow
33. A Final Comment
“We cannot leave any stone unturned in our quest to find the
best lending solution to meet our customers & prospective customers
needs both now and in the future”
Stephen Hester
Chief Executive Officer
RBS Plc
34. Questions & Answers
Thank you
For any enquiries please contact:
Nicholas Wood
7th Floor
280 Bishopsgate
London EC2M 4RB
Nicholas.wood@rbs.co.uk
T: 0207 672 1966
