Finance Options Available
Over the years since we started TBK Capital I've written a series of newsletters about raising debt finance for property and business. The first was Bank and Other Funding Options which was published nearly 7 years ago.
Over the years since we started TBK Capital I've written a series of newsletters about raising debt finance for property and business. The first was Bank and Other Funding Options which was published nearly 7 years ago.
Others included Securing Funding in Today’s Market - Choosing the Best Loan & lender - Inflation, Interest Rates and Borrowing - Cashflow Solutions – and Housing Up, Lenders Flush, Time to Borrow. The last one - Debt Finance Options Available - came out in July last year and this newsletter is largely an update on that one.
At one of our recent regular weekly meeting with our sister company Tabak, I asked what difference has there been in business sales since the change in government. Their conclusion was, as one would expect, there was a pause in the latter quarter of 2017 to determine the lay of the land quickly followed by renewed activity.
This led to a discussion on Labour’s policies, including the 90 day trial period for new workers, and its implementation for companies with 20 employees or more. However as 97% of all enterprises have fewer than 20 employees, the general answer was again “not much” – well certainly with most of the businesses TBK Capital and Tabak Business Sales have as clients.
So for us its business as usual and here’s what we think about raising loans.
Where and How
The main problem borrowers have is not knowing where to go, who to talk to, and how to present their case. And when they do, an unsuccessful result is usually the result of:
· Poor quality of presentation (usually not providing the information required for the lender to assess the loan) 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 when. And because the lending criteria and cost of funds can vary dramatically between different financiers, what and how you present your proposal to them.
At TBK Capital we have wide access to loans for property and businesses. Here are just some of them.
Bank Funding
Residential property lending remains the favourite for banks with commercial
and industrial property a close second. Finance for subdivisions and
developments is mainly restricted to long term clients, and it’s unusual for banks
to be interested in development requests from new ones.
Bank loans for businesses are our specialty at TBK Capital. They remain the cheapest form of finance with comparatively low interest rates. It’s interesting to see how banks vary their enthusiasm for business lending according to the times and their internal loan allocations.
Most small
businesses have their bank facilities secured against the owner’s house or the
property from which they operate their business. Other hard security can
include other property they own, plant, equipment, vehicles or stock.
For established profitable businesses with good cash flows, hard security is
less of an issue. And when banks are seeking more non-property related
business, “cash flow” lending with GSA security is becoming more common.
New “Bank Lending” is now becoming available from offshore. Mainly development finance. Generally quite “tight” conditions but with clear authority on loans they will consider. Good interest rates too.
Unsecured Business Credit Line
At the other end of the spectrum from the banks, and relatively new to New Zealand, is a lender that specialises in providing shorter term completely unsecured loans to businesses.
These are in the form of a line of credit from $10,000 to $250,000 and only incur interest when drawn down. Requirements include minimum of 2 years trading and $200,000 p.a. in revenues.
Non-residential Property Finance
Often banks will not lend on commercial 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 have access to low IRR non-bank finance for larger development loans, land
bank facilities, and bridging loans. Also completed product and low risk
transactions at attractive interest rates. Range includes loans in the $1
million to $15 million bracket.
We also have access to short term bridging finance for property and business and second mortgages.
Second Mortgage Finance
Used to unlock the equity in home or investment property to meet short term requirements like IRD debt which could result in subsequent bank takeout. Maximum term is 12 months. Specialist lender. Worth discussing if you’re interested.
Debtor and Invoice Finance
SMEs looking for working capital to fund expansion traditionally borrow more by
increasing their loan against the assets they have offered as security – like
property - which may well have grown in value, plant, machinery or vehicles.
However there is a limit to this as many business don’t have plant, machinery
or vehicles and that for those that do this type of collateral 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 with varying criteria. 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 (excluding debtors) can remain for other facilities.
· The debtors book is often the largest asset in the balance sheet and larger borrowing limits may be accessible than offering existing hard security.
· It allows the business to access bulk and early settlement discounts from suppliers.
· As the business grows so does the size of the facility.
The advantages this has 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 asset that determines the amount of a loan - not so much the performance of the business (like start-ups).
It’s the current business performance that determines the level of the facility rather than outdated trading history.
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.
Peer to Peer Lending
Relatively new to New Zealand, but already having experienced 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.
Isolate the Security
It’s 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.
This is our
specialty at TBK Capital. 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 21 902 901, or simply by replying to this email.
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The above investment is not
an offer of financial products that requires disclosure under the Financial
Markets Conduct Act 2013 (Act) and is available only to wholesale investors as
defined by that Act. It is intended for distribution only to selected
people to whom, under the relevant laws, it can be lawfully distributed. It
cannot be distributed in any other jurisdiction, or to any other people. It is
not an offer or solicitations in any jurisdiction in which such offers or
solicitations are not authorised, or in which the person making such offers or
solicitations are not qualified to do so, or to any person to whom it is
unlawful to make such offers or solicitations. Any representation to the
contrary would be unlawful. No action has been taken by any person that would
permit a public offering in any jurisdiction where action for that purpose
would be required.
Cheers
John Paine B.Sc.,
Dip BIA
TBK Capital Limited
Level 10, 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