At Projects RH, we pride ourselves in being very good at connecting projects & money. We work with our clients, and our strategic partners, to introduce potential investors or lenders to exciting projects and opportunities.
Clever Finance Solutions is one of said strategic partners. Based in Pitt Street Sydney, it operates nationally to provide its clients with business and personal financial solutions to assist them in navigating the deals available from different lenders in the credit market.
Like any good commentators, we need first define a topic: refinancing is a replacement of an existing investment or debt with a new investment or debt. It is most common where experts like Barry Watkins, CEO of Clever Finance Solutions[3] assist clients to replace one loan with another. The opportunity or need for refinancing of debt facilities generally occurs because the term of the loan has expired, the lender no longer wants this type of business, or a better deal is available elsewhere and generally the funds need to be replaced or there is a strategic change in the business which necessitates refinancing. An example of the latter is where a company sells a strategic asset and triggers a condition which requires a loan to be repaid, partially or in full. The term is most commonly applied when people change their home loans for a better deal. Other common events are when a business is restructured through an acquisition, divestments or through a merger and when the shareholders change which may occur through intergenerational transfer of shares.
Companies often borrow on a fixed term basis. This means they simply pay the interest on loan and at the end of the loan, commonly five years, this loan needs to be either rolled over or replaced with a new facility.
In the current markets, because of the dramatic reduction in interest rates even over the long-term, many people are seeking to review their loan facilities with the aim of getting the same for less.
It is important first for me to make it abundantly clear that Projects RH is not authorised by a Credit Licencee to provide loan broking or advisory services. This we leave to the experts like Barry Watkins. At Projects RH we generally become involved in the need for accredited advisory service because when working with our clients they need debt facilities in the business and it would not be appropriate, and probably because they cannot afford, to invest more money in the business.
Refinance documents
Projects RH acts like a company member or hired CFO/Treasurer, and where appropriate supported by a strategic partner, prepare the support documents, and assist the directors with their applications. If we have prepared the support documents a typical application would include financials, company/trust/director details and background, collateral, why the deal makes sense.
What does Projects RH do?
It is not uncommon for our clients to approach us and say we are looking at our capital structure and see that our core debt facility expires in six months and frankly if the bank decided not to renew it we would be unable to repay it and as a consequence would move into default. We would like Projects RH to work with us over the next two months to repair our documents to go to a licenced credit adviser and for them to go to the market and see if they could get for us a cheaper facility or rollover our existing debt, with our existing provider, at a cheaper rate and under more favourable terms.
Our job at Projects RH is then to work with the team at our clients, and often with their external advisers, such as lawyers and accountants/tax advisers to understand how the company has been travelling and the history of debt repayment with their current provider.
What we discover generally, is that medium-sized businesses have a string of loans from a number of different providers which have different terms and conditions. The shopping list generally includes:
- core debt
- working capital facilities
- trade creditors
- credit cards
- performance bonds
- import/export financing
- leasing or owning premises
- financing inventory
- equipment loans
- car loans
- commitments with respect to bonds paid for rent (generally a bank guarantee for three months’ rent).
The object of refinancing is to reduce the cost of funds and the amount paid these. For example, is it cheaper to have run the business of credit cards also have specific business debt?
Invariably, in small to medium size businesses, the director/owners have given personal guarantees and more commonly than not they have given specific guarantees over residential real estate – i.e.; their homes. As businesses grow, diversifying, taking new investors or have an intergenerational change of ownership the personal liability aspect of this leads to shareholders wanting the company to standalone even if they have to pay for a premium for this.
Commonly, their accountants and lawyers want to separate their private and professional lives, and separate family assets and those of the business. The latter, is especially important, if there is to be any change in the management/ownership of the business.
Any kind of succession planning causes business owners to need to look at how their businesses are, and will be, financed. Each of these changes will constitute a refinancing.
Project RH’s role
Our clients often approach us to say it’s time to review our credit exposure and the package of debt finance we have.
We work with our clients to ensure that they have up-to-date financial models, business plans, and commentaries on the business which can be quickly updated to become information memorandums.
We can look at their accounts and the different payments being made on different debt facilities, whatever they are called. Many businesses have more expensive forms of finance there would be available if they secured debt funding. Each on the finance has different accounting and tax issues which need to be considered.
If available, an overdraft is generally substantially cheaper than using credit card finance.
Working with Clever Finance Solutions we find the information they need to prepare the case for different lenders. We assist the client to prepare this information in a way that Barry Watkins and his team quickly apply to determine the available financing alternatives and costs for the client.
We also look at other strategies. Quite often were a tender requires a supporting bank guarantee we find that insurance bond will equally meet the requirement. Many of our clients tell us to get a bank guarantee they need to cash collateralise it. This is a need to place money in the bank for the bank to provide a guarantee against. In effect they are putting up their own money. Given those companies have a significantly higher cost of capital and even a weighted average cost of capital of more than the bank deposit rate paying a higher premium to receive an insurance policy may be more effective for the company.
Other Eyes
As working directors focus on their business on a day-to-day basis it is often easier to accept simple solutions such as vendor finance. Many suppliers of assets which have a life of 3 to 5 years often supply vendor finance. It may be a lease or hire purchase. Whilst the interest rate may appear to be reasonable if you divorce the purchase from the funding often you will get a better purchase price.
Seeing opportunities like this only occur when you have processes in place that is review by finance committee for an external advisor such as Clever Finance Solutions. Equally important is to understand if you are being offered a lower purchase price because you are taking high-priced money.
Events of 2020
Whilst many of us will remember 2020 as the year we spent much time working from home and not travelling what it should be remembered is how it’s changed the market. It will be a time when we remember we took easy solutions and wants to conserve capital. We have all heard the stories of how the banks are moving slowly simply because their people are impacted by Covid-19 too.
2020 will be recognised as a year of change and the beginning of reconstruction of many firms. This reconstruction will include mergers, acquisitions and divestments. For some it will be sad for many is the beginning of a new lease of life. All these changes will impact upon our ability to finance and refinance. It is a time when you need to have expert advice on your side.
We will see companies challenged to ensure that they deliver strong shareholder performance. Some will see opportunity to merge and acquire plus divest, regrettably others will need to divest to reduce their leverage.
2020 and 2021 will be years of reconstruction and opportunity. We all need to look ahead, with a sense of reality, tempered by a sense of optimism as we work in a country that is blessed with vast natural resources and the people who will bounce back
Conclusion
At Projects RH and Clever Finance Solutions work with our clients to achieve their goal. We are excited by what we do and in each stage of the market we see huge opportunities and welcome to share those with our clients.
2020 will be year of change and opportunity in the financing and refinancing areas of the economy. We look forward to working with you as you realise the opportunities that are ahead.
By Paul Raftery, CEO, Projects RH, and Barry Watkins, CEO, Clever Finance Solutions
9 July, 2020
Projects RH is not a licenced financial planner. If the director of our corporate client needs professional advice, we would refer them to our strategic partner, Graham Kinder, of RiverGold Capital, who is an appropriately certified financial planner.
Clever Finance Solution Pty Ltd (CFS) is Project RH’s strategic partner in assisting our clients with debt finance for their businesses. It is important to note that Projects RH is not a licenced credit adviser so we need work with someone who is. CFS is ACN 139 442 201
ABN 91285234136 and holds Australian Credit License 391031.
