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Home > Balance Sheets Best Practice > Corporate Finance for SMEs

Balance Sheets Best Practice

Corporate Finance for SMEs

by Terry Carroll

Other Forms of Funding

Beyond sales and shorter-term borrowing, banks offer several other forms of financing, at various cost levels:

Asset-backed

  • property finance;

  • asset finance, including leasing, HP, etc.;

  • stock finance.

Quasi-secured

  • payroll finance;

  • invoice discounting (not the same as factoring, but similar).

Unfortunately, as the credit crunch deepened, the availability of finance fell and the price increased. In particular, property finance became scarcer, with much lower loan-to-value (LTV) rates, as banks found they were yet again overcommitted to commercial property finance less than 20 years after the last property crash.

In summary, therefore, funding has always been available for well-run, profitable companies of any size generating regular cash flows and with assets to act as collateral. With little interbank lending taking place, resulting in shrinking wholesale funding and a liquidity squeeze, it has been no surprise that banks in general became more cautious about the scale and security of their lending.

Transaction-Based Corporate Finance

As in the wider markets, M&A activity has slowed dramatically, due both to a shortage of funds and to the greater overall perceived risk of corporates in a slowdown. In the case of both M&As and management buyouts/buy-ins, the transaction is primarily based on the track record of sales and profit generation and the capability of the business being acquired.

The more doubtful the recent and projected profit record, the more likely it is that the majority, if not all, of the funding will need to be based on assets and/or quasi-assets.

Tax, Legal, and Professional Advice

Some may think that corporate finance is an industry invented by professionals to generate fat fees. However, there are many pitfalls in trying to do it yourself. The finance director or owner is generally unlikely to get the best terms possible, even if they run a competitive auction.

Professional advisers, such as the accountancy firms, will usually have better and more banking and financing contacts. They should also be able to exert more leverage on the banks, as they have their whole clientele as the lever, rather than the business and assets of a single company or business.

Many people also resent paying what they regard as high or exorbitant fees, especially to lawyers. While there may be the odd less scrupulous professional adviser, in the main you will be paying for massive accumulated experience of the best and most efficient ways to source, transact, and document the finance, as well as avoiding myriad pitfalls.

While sale and purchase agreements and shareholder agreements may have a standard form at their core, each company and set of directors is different. Finally, there will be tax implications for every corporate finance transaction, whether for the organization or the individuals concerned. If you have the right advisers, there is no harm in taking a degree of responsibility on yourselves, but your advisers can save you money and help you avoid penal costs and consequences.

Conclusion

Corporate finance can mean different things to different people; even the banks divide it into at least three categories: commercial finance, corporate finance, and structured finance. In truth, however, it is about just one thing—how the business is financed. The key is the whole balance sheet approach, looking not only at the optimum mix of short- and longer-term finance, but also at the overall picture: which liability funds which asset, at an optimum balance of cost and risk.

At its best in practice, corporate finance can be a sophisticated science. This does not make it any less applicable to SMEs. While the scale and nature of transactions may often be smaller or simpler, there is no reason why similar principles and practices shouldn’t be applied. Equally, for firms that have the necessary breadth of skills, the fees do not need to be exorbitant either.

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