Accessing Financing is About to Get Harder – Here’s How Being Financially Fit Can Help You in 2019
By: Gary Palmer, CEO of Paragon Lending Solutions
The mid-term budget saw Treasury more than halved its economic growth forecast for 2018 to just 0.7% after the local economy dipped into a recession in the first half of the year. The GDP hasn’t expanded at more than 2% annually since 2013 and the official unemployment rate sits at 27%, although reality suggests a much higher figure.
Many businesses are looking to shore up their operations and weather the storm. But, despite the weak fiscal outlook, there are always opportunities in adversity. Staying financially fit means smart leaders can still be in a position to access finance to take advantage of deals that may come their way.
Here are seven rules to play by to stay financially fit and remain attractive to lenders:
1. Prepare for more tax audits
While government struggles to balance its economic, social and fiscal objectives, the one thing we can be sure of is that they will need to get their money somewhere. Businesses can expect even more aggressive revenue collection and should prepare for increased audits.
We recommend companies do the legwork in the short-term to avoid long-term pain. Audits take time and management focus and are not good for business. Finance teams should carefully look at their reporting, prepare for extra paperwork and get audit-ready right now.
2. Mind your gearing
Recessions will always result in lending institutions tightening up their criteria. Business owners should take a careful look at their liabilities. You don’t want to be over gearing yourself and should be striving for a healthy loan to value ratio.
This may also be an ideal opportunity to restructure debt and it’s always worth reaching out to your financiers to see what options are available. If you can proactively manage your debt to maintain a healthy cash balance, you have a much better chance of weathering the storm.
It’s also a smart move to do a credit check on yourself, to be sure you know how you will be viewed and that nothing comes as a surprise when sitting in front of potential investors or financiers
3. Manage your past, and your future
Make sure you and your company are in good standing. Unlike the US where business owners can fail in a venture, dust themselves off and start again, South Africa tends to have a rather punitive view on directors of failed companies. Many business owners who have gone through a sequestration are choosing to put family and friends forward as fronts to new business ventures. Should this come out in the discovery phase of any loan application, it will likely scupper the opportunity.
We believe in being upfront with financiers. By putting all your cards on the table and rather focusing on the fundamentals of the new venture, you have less to worry about in the future.
It’s also a smart move to do a credit check on yourself, to be sure you know how you will be viewed and that nothing comes as a surprise when sitting in front of potential investors or financiers. A bad credit record can result from more than defaulting on payments. If you are flagged as a slow or late payer, your credit record will suffer and your ability to secure finance can be impacted. Working with a lending partner who knows your history will significantly improve your chances of securing future credit.
4. De-risk where you can
The only certainty in the current market is uncertainty. Investors and shareholders alike want to see that you have minimised your exposure to volatility. Taking forward cover should be at the top of your list if your business is exposed to currency shifts. It is also reasonable to expect some further upward movement in the interest rates over the next few quarters. Fixing interest rates should be considered. Property owners should also look into what financial instruments are available to them to manage these fluctuations. Like forward cover, cap and collars can be put in place which will set upper and lower limits to the interest rates charged and can protect all or part of your loan against future rate volatility.
5. Be flexible and expect delays
Business owners need to differentiate between a client who can pay, but won’t and a client who wants to pay, but can’t. Taking a hard-line with the previous and having clauses in your agreements which allow for immediate remedial action is important. When dealing with a client who wants to pay but is facing an immediate cash crunch, business owners should work out a way to still receive the money, but that doesn’t overburden the client. Negotiating repayment terms can save their and your business.
Similarly, if a business finds itself facing cash flow challenges, we recommend that they immediately communicate with their creditors. Most companies prepare for delayed payments and are willing to negotiate terms if they know that they have a good chance of recouping their investment. By remaining quiet in the hope that your creditor will not notice your default is naïve and could land you in a situation where you are blacklisted and your good standing is forever tarnished.
6. Don’t wait to optimise operations
When the tide goes out, everyone can see who is swimming naked. Business owners should not wait until the last moment to take steps to ensure they are running a tight ship.
A hard look at operating expenses and finding ways to work smarter is imperative when the economy tightens. Outsourcing non-core operations and using new technologies to automate certain functions can make a significant difference to the operational efficiencies of a business. These processes can take time however, and exploring your options while your business is still healthy will mean you are making rational decisions based on long-term requirements.
Taking steps to increase your company’s financial fitness can make all the difference when the going gets tough. Riding out the bad times is not simply about keeping the doors of your business open. A financially fit company is far less likely to face the grim prospect of laying off staff and is also able to take advantages of the good deals which become available in a downturn economy. After all, keeping people employed and the deals flowing is exactly what the country needs if we hope to turn this corner.
7. In adversity lies opportunity
The finest business minds have always seen opportunity in a downturn market. Nobody should take pleasure in other’s pain, but there will be great deals to be had as cash strapped businesses look for lifelines. Business leaders should have a war chest available to them to take advantage of great deals which come their way. Getting your business fighting fit in a recession is the smart thing to do. It is worth applying for finance ahead of time to ensure your company has first-mover advantage when the opportunities present themselves.