Summary
¦ Barclays Corporate funding approval has remained at 80% in the downturn.
¦ Perceptions of a lack of business finance were due to new lenders pulling out in the downturn.
¦ Credit remains relatively cheap.
¦ Keys to accessing bank funding are contacting lenders early and providing full, current financial information.
¦ Lack of cash is the main reason companies fail.
At this time of year, it’s customary to reflect on the previous 12 months and, for the timber industry, 2010 certainly brought its fair share of challenges.
New build construction levels remained low and government spending cuts were announced which will undoubtedly have future consequences for the industry. Severe weather at the beginning and the end of the year didn’t help. Supply constraints and input price increases brought more uncertainty.
There were also, of course, difficulties with the credit insurance market and perceptions of a lack of credit from the banks. But, contrary to popular belief, banks are working very hard to ensure there is sufficient funding in the market for those in the timber industry who can present a viable business proposition.
The major UK banks actively lent through the credit crisis and at Barclays Corporate our approval rates remained consistent throughout – at around 80%. Lending is an essential part of any bank’s DNA – without lending no bank would survive.
Retreat from the market
What led to the commentary that the banks weren’t lending was largely due to the retreat from the market, as we went into the depths of recession, of a number of foreign banks (primarily from Iceland and Ireland) and non-bank lenders which flooded the UK market prior to the credit crisis. But we have seen no evidence of a widespread, unmet, need for credit.
What we have seen is timber businesses remaining prudent in times of uncertainty and choosing not to draw down on the overdraft facilities available. As an industry, businesses have been borrowing less and improving working capital and cash reserves in line with the rest of the economy, which continues to de-leverage.
Many management teams have also been delaying capital investments but, this cannot be postponed indefinitely and we expect to see an increase in borrowing from businesses working in the timber industry to fund investment and to take advantage of strategic growth opportunities as the economy recovers and confidence increases.
Credit also remains relatively cheap. Interest rates are at historic lows and the cost of credit is now actually down on 2007. However, rates will not remain low indefinitely, and under the current regulatory framework, margins are unlikely to compress. This means the cost of credit will increase.
Three steps to funding
So how should timber businesses best prepare themselves to access the funding they require as opportunities emerge and the cost of credit remains relatively cheap? There are three clear steps that businesses can take to maximise their chances of securing the bank funding they need.
? The first is to engage with lenders early and openly. Whether the business needs funds to address financial problems or to exploit investment opportunities, it is vital to give lenders time to make an informed decision in a transparent, open dialogue.
? Secondly, a business needs to provide good quality, detailed information to enable lenders to assess funding requests. This ought to include an understanding of historic, current and forecast trading performance. While profit and loss and balance sheet are very important, banks are most interested in a business’s cash flow.
Cash is, after all, one of the most important aspects of running any business whether you are a multi-national corporation or a small independent operator. It is the single biggest reason why companies fail, regardless of how strong the proposition. So demonstrating careful cash flow management is vital. Providing detailed cash flow forecasts under various scenarios, complete with strategies for responding to various risks, is essential.
? Thirdly, it is important to provide the bank with ongoing high-quality management information, demonstrating management’s firm grip on the business. This information should include not just financial metrics, but also operational measures used for day-to-day decision-making. The bigger the business, the higher the quality of information expected.
These three steps will not only improve business’s chances of raising finance, it will also enable the bank to tailor the ideal funding package, with the right product, funding structure and price.
Talking to our clients in the timber industry about short-term prospects, caution does find its way into every conversation but there is a genuine desire from most to being more externally focused and positioning themselves to take advantage of opportunities that may arise.
Timber has an essential part to play in the recovery of the UK economy and it is important that companies have a bank to support their activities. At Barclays Corporate we remain committed to the industry and are focused more than ever on not only supporting existing clients but forming new mutually beneficial relationships with others in the sector.
