Debt Finance Options Available Through TBK Capital
A while back I wrote a series of newsletters about raising debt finance for property and business, the first of which – Choosing the Best Loan & lender – commenced with the statement “I’m constantly amazed how many bankable projects don’t get financed”.
Everything will be all right in the end.
If it’s not all right, it is not yet the end.
Patel, Hotel Manager - The
Best Exotic Marigold Hotel
A while back I wrote a series of newsletters about raising debt
finance for property and business, the first of which – Choosing the Best Loan
& lender – commenced with the statement “I’m
constantly amazed how many bankable projects don’t get financed”.
Well quite a bit’s happened since then so I thought it was about time we
revisited this subject. But before we do, the main problem borrowers have is
not knowing where to go and who to talk to. And when they do, an unsuccessful
result is usually the result of:
- Poor quality of presentation (which muddies the waters and makes the loan difficult to rescue) or:
- Not knowing how to structure the proposal to achieve the desired result.
Ultimately the difference between success and failure comes down
to who you talk to and what you present to them!
And I’m also amazed how the lending criteria and cost of funds varies between
different financiers.
So let’s look at some of the debt funding options available - for both property
and business - and comment on their usefulness. First let’s look at two of the
latest sources of finance new since the last time I wrote to you.
Offshore Finance in New
Zealand Dollars
We’ve recently secured access to foreign investment, including offshore loans
in a range from say NZ$1 million to NZ$100 million or more. The finance is
available in New Zealand dollars. For more information reply to this email or
give me a call.
Peer to Peer Lending.
New to New Zealand, but already having experienced massive growth
internationally, Peer to Peer lending is somewhat similar to Crowd Funding when
a number of members of the public provide smaller amounts towards the loan.
Most of New Zealand’s peer to peer lenders are in the consumer lending space
with unsecured loans from $1,000 to $30,000.
At TBK Capital we’re not really in the business of arranging consumer loans,
but we now have access to loans for property, business, or plant and equipment
for secured loans of up to $2 million. If you’re interested reply to this email
or give me a call.
Traditional Bank Funding
Banks are eager to lend. Residential property remains the favourite but there’s
plenty of money available for commercial and industrial property, subdivisions
and developments, and for businesses.
Banks remain the cheapest form of finance with low interest rates. They usually
prefer loans to established businesses or well tenanted commercial and
industrial property. But now we’re seeing banks extending their interest to
smaller deals that were previously the domain of second tier lenders.
Most small businesses have their bank facilities secured against property –
often the owner’s house or the property from which they operate their business.
Other hard security can include other property, plant, equipment, vehicles and
stock.
For established profitable businesses with good cash flows hard security is
less of an issue. And at a time when banks are looking for more business, “cash
flow” lending is becoming more common.
Plant, Machinery and Vehicle
Finance
This is a common form of finance for businesses. Other than the banks there are
a number of specialist providers in the market.
Loans are generally used to purchase new plant, equipment and specialist
commercial vehicles for new businesses or expansion of existing businesses – or
as a form of temporary finance using these existing assets as security.
Debtor and Invoice Finance
SMEs looking for working capital to fund expansion traditionally borrow more by
increasing their loan against the hard security offered as collateral – like
property, plant, machinery or vehicles. However there is a limit to this as
that type of security has a set (and often decreasing) value.
Debtor and invoice finance is now a common method of funding businesses, and
there are more players in the market now. It’s ideal for expanding
businesses that qualify and is one of the most flexible funding arrangements
available.
- No real estate, plant, vehicle or other hard security is required.
- Security is over debtors leaving other assets free to raise further funds if required.
- First ranking GSA security can remain for other facilities.
- As the business grows so does the size of the facility.
- The debtors book is often the largest asset in the balance sheet and larger limits may be accessible than offering existing hard security.
- It allows the business to access bulk and early settlement discounts from suppliers.
Advantages over other forms of asset secured loans include:
- Property security is not locked up. It’s safe from call by the lender if there’s any downturn in the business, and can be used for other purposes.
- With hard security it’s the current value of the security that determines the amount of a loan - not the performance of the business.
- Current business performance determines the level of the facility rather than outdated trading history.
Commercial Property Finance
Often banks will not lend on property for technical reasons. These include:
- Current overall exposure to the client exceeds credit guidelines.
- Inability to meet principle and interest (P&I) servicing requirements.
- Too many vacant tenancies.
- Loan amount too high to reach loan reduction requirements.
- Loan to valuation ratio too high.
- Term of loan too long.
- Earthquake requirements.
This is where non-bank lenders become a viable option. They
usually have a more liberal, or more flexible lending criteria. And their
interest rates have become more competitive.
We also have access to non-bank finance for commercial property on good terms
in the $2 million to $20 million bracket - amounts that are quite difficult to
get from other non-bank lenders.
Developments and
Subdivisions
It’s no secret there’s a severe housing shortage in Auckland. Finance is easing
up for developments and subdivisions in the appropriate areas in and out of
Auckland. And it’s readily available for smaller projects like subdividing off
a section or sections and building houses, or purchasing sections and building
houses in a planned manner.
Isolate the Security
It is sometimes helpful to move loans on some assets to another lender, usually
from a bank to a non-bank lender with slightly different criteria. An
example is where the isolation of the security means performing assets cannot
be called upon in the event a non-performing one comes under pressure.
Another advantage could be less cash flow servicing requirements as interest
only lending replaces P&I.
Refinancing works well for a business when the original borrowing (usually from
a bank) requires residential collateral security. As the business has grown
that requirement may well have passed – but nobody in the bank has told you –
and it could be replaced by the other forms of security mentioned in this
newsletter.
Finance or Re-finance for
Bank Takeout later
Sometimes you're not quite ready for bank lending and need a short term loan
until you are. This works for both property and business loans. Examples
include finance for:
- Commercial property being refurbished or re-tenanted.
- Residential and commercial real estate with short term debt servicing issues.
- Almost finished developments requiring short term funding to complete.
- New businesses.
- Growing businesses strapped for working capital to fulfil orders.
- New plant and equipment for expanding business.
- Increasing debtors.
- New and/or larger debtors demanding longer payment terms.
- Cash flow lending for businesses not quite ready for bank finance.
We work closely with banks to obtain temporary finance from
other sources for bank takeout when pre-agreed conditions are met.
Picking the Right Lender
The information given in this newsletter is of a general nature. Borrowing
conditions will vary between lenders and over time. In essence the message is
if you’re looking to borrow money - it pays to shop around. That's what we do
for our clients.
Happy to hear from you
I’m always happy to hear from you if you’d like to comment on the matters raised in our newsletters – or of course it you’re looking to raise debt or equity for business or property or would like to invest in either.
The best way to keep in contact is to phone me on +64 9 307 3257 or +64 21 902 901, or simply by email.
Cheers
JP
John Paine B.Sc., Dip BIA
TBK Capital Limited
Level 15, BDO Building
120 Albert Street
Auckland 1010, New Zealand
Phone +64 9 307 3257
Fax +64 9 309 4519
Mobile +64 21 902 901
Email john.paine@tbkcapital.co.nz ⇑ back to top