Raising Finance – A Problem For Some?

Yes, it most certainly is but why?

My advice to all businesses, agricultural or not, is fundamentally the same, or at least substantially similar – before you try to finance or refinance your business try to ascertain from the prospective funders’ perspective what the barriers are. This advice holds true regardless of which sector you operate in. Most business operators simply do not know enough about the subject of raising finance to give themselves an edge. It’s a bit like trying to buy a new tractor. You wouldn’t do it without knowing the product or at least finding out what you need to know. It is true to say that finance is rather more complex (or at least it appears to be) but knowing the basics of the market can be of great benefit.

Today’s finance market is being driven more by availability, or rather the lack of it, than any other factor. Imagine yourself as a funder. You have a finite pot of cash and a whole load of takers. It’s the same as producing 400,000 tones of wheat and having buyers for 600,000 – who do you sell it to? The immediate answer is, of course, to the highest bidder and that holds true for funders. However unlike sellers of wheat, funders are also thinking very carefully about how to get a good return on their money. If you thought that someone might not pay for the produce, would you still deliver it? Of course not, and this is the first lesson. Make your funders confident that their money is safe; by doing so you have more chance of securing the funding and getting it at a better rate. Dare I say it, it’s a bit like selling to a supermarket chain – they don’t pay as much but you know that you’ll always get paid. There are fundamentally a few rules to consider as outlined below.

First rule: in practical terms how do you do demonstrate that you are a good bet? Be prepared to provide information relating to your business that until only 18 months ago you were not required to divulge. The days of ’back of a cigarette packet’ underwriting are sadly gone for now. The more your funder knows about you, the more the chance that they will offer you finance on terms that truly suit your circumstances.

Second rule: be prepared for difficult questions. Let’s say you are an egg farmer. How is the cage ban going to affect your business? The wrong answer (although arguably true) would be that it’s just that EU lot taking a punch at farmers again. The right answer (although arguably less palatable) would be that as the WTO doesn’t see regulation as a barrier to trade and we are going to face a new disadvantage from those exporting from outside the EU, which we recognise and for which we have already started planning with the installation of new equipment. We have calculated that if we lease the equipment, it will add X to the price of each 1000 eggs. We produce Y eggs per year and therefore we can price it in – and of course our product is better, even premium, therefore we can stand the increase. Then swallow hard, really damn hard!!!

Third rule: develop an understanding of financial products and how they can help your business. This will sort the wheat from the chaff, if you pardon the pun. I shoot over farm land year in, year out and listen intently to the host, usually a farmer, with great interest. The futures market (upon which I cannot advise as I am not FSA registered) now plays a part in all of our business lives. My views on playing it as a friend not as an adviser, are a bit dreary, I’m afraid. Sell future to cover your production COSTS, sell spot to take PROFIT. That way you lock in the costs and only risk the bottom line. We all know farmers who have sold the lot in futures then the price has moved against them and they have kicked themselves.

Fourth rule: explore other financial products. Explore Invoice Finance as an alternative to traditional methods, such as first charge over your land, house, livestock, family and chattels, overdraft type borrowing. Invoice Finance grows with you and if utilised properly, will also help you to decide who to supply and how much credit to extend. Bad debt may not be at the front of your mind now, but too many suppliers to many large and familiar high street names made the mistake of thinking that it couldn’t happen to them – don’t be one of them.

Fifth rule: make sure that you use the right funding product for the right task. I see farmers day in, day out who have used their overdraft to pay for their tractor, refinancing it at a higher than necessary interest rate to provide working capital. They then sell their produce on the futures market to lock in a small profit, before finally remortgaging their farm house to pay for school fees. To me that seems cock-eyed but it’s a reflection of the realities of not thinking forward.

So, in short the advice on raising finance in today’s incredibly tight market is as follows:

• Think forwards, use the right product to fund the various elements of your business.

• Use the futures market to lock in costs and only risk the profit.

• Consider alternatives to your ever more demanding bank.

• Get your ducks in a row before you apply.

• Be prepared to put forward a really good, fact based argument and plan.

• If you don’t know how to do these things ask someone to help you and be prepared to pay them for their time, the investment is smaller than you realise.

• Understand that banks and lenders are out of cash because they lent too much money to people that couldn’t pay it back and as a result, they will only lend to you if they are convinced that you won’t turn into one of them, costing them their job.

Who am I? My name is Robert Keep, Managing Director of Norton Folgate. I am an asset financier, broker and consultant. I accurately predicted the current liquidity crises (credit crunch) in 2005 long before it happened. I have worked in the finance market since 1984 and have transacted over a quarter of a billion £’s of finance since 1996. I don’t know all the answers, but I hope that you will find this topical advice of interest. If you do, you can contact me at www.nortonfolgate.co.uk