Banks are placing more importance on personal guarantees than they did 10 years ago and they want to know that business owners are invested, according to Matt Parkinson, Partner at Grant Thornton New Zealand.
“They want business owners who are prepared to have some ‘skin in the game’. The more skin, the more comfortable they become.
“For start-ups and companies that might be in speculative sectors, such as property development, banks will protect themselves by demanding comprehensive personal guarantees. If a company has a proven record with the bank, personal guarantees may be negotiated. This could be on the amount that the bank requires as a personal guarantee or the timeframe, with a personal guarantee being in place for the first three years of a 10 year deal,” Parkinson says.
“There is always the option of not signing a personal guarantee, but the flip side is that the banks may decide not to grant the loan.”
Parkinson says it’s important to remember that when the debt is extinguished, the personal guarantee should be extinguished at the same time so that it doesn’t roll over in to other areas of the business.
When there is more than one guarantor involved then the guarantee will usually be for joint and several liability. This means that the bank can chase all owners or they may decide to select one, because that person may have more wealth available or be an easier target.
Parkinson says that a common mistake made by businesses facing cashflow problems is that they don’t talk to their bank. Having an open dialogue with your banker is one of the key requirements to surviving difficult times.
In the short-term, there are also some things that may help to alleviate financial pressure:
- Reduce personal drawings.
- Put some personal capital into the business to get it through the rough patch.
- See what changes can be made to current debt terms. Can they be pushed out?
- Investigate if it is possible to take out a new term loan or increase your overdraft?
- Make sure you do not get behind with payments to the IRD, especially for GST and PAYE. It can be very costly if you get behind with these payments.
- Look at tax pooling intermediaries, who operate tax pooling accounts with the IRD, to finance your income tax payments.
- Focus on your debtor collection and chase tardy payers hard.
- Look to extend terms with your creditors.
- Look at sale and lease back options for some of your equipment and property.
Long-term actions could include:
- Writing a strategic plan. Businesses without a strategic plan are more susceptible to failure when they run into financial problems.
- Producing a three-way financial forecast that includes an integrated profit and loss, balance sheet and cash flow.
- Looking at cost efficiencies in your business. This should be part of regular management practices.
- Looking at your debt structure. Is it efficient? Look at your overdraft arrangements, your long-term debt, trade finance and also debtor financing.
- Analysing your management reporting. Your finance team should be producing accurate and timely information, especially information to support key decisions.
- How good is your governance? If you are too busy in the day-to-day running of your business, you may not take the time out to look at important issues such as risk management, forecasting, legislative environment, overall debt structure and a strategic overview.
- Learning to understand your cashflow cycle. Try to highlight potential pressure points ahead of them occurring: seasonal fluctuations, Christmas holidays, maintenance periods, capital purchases, tax liabilities etc.
Parkinson says debt factoring is becoming more and more popular. There are several variations of this but usually a business owner sells the receivables in the form of an invoice to the factor, who makes an advance of X% of the purchase price of the receivable amount.
“In the past debt factoring was seen more as a last resort but it is now looked upon as a very viable, strategic option, so long as there is a clear plan and timeframe around it.”