Raising Finance via Banks

j_lyon007

Hello,

I am not sure that this is the right thread but hopefully someone may be able to help. Over the last few weeks I have been in negotiations with a potential client about doing a project and things have progressed well to the stage that in December they want to draw up heads of terms, legal issues etc. They have already told me that I am their preferred vendor so the outcome is looking pretty positive. It is a large project, however it will require me/company ( will need to set up a new company ) to have approx €400,000 in capital to get going on it. Half of that has already been raised (€200,000) through a private invester, leaving the balance still unfunded.

My question is, with heads of terms agreed (for example confirmation of orders from client who are a big player in the marketplace) and €200,000 in capital raised, would the bank match our €200,000 via a business loan and if so, does anybody have any experience with this in relation to which bank would be best to approach? Bear in mind that, it will be a new company with no trading history etc. Also, it is always difficult to talk to the decision makers in banks, so if anybody has any contacts or experience dealing with the right people so the process (either a yes or no) would be reasonably quick. What I dont want to happen, for obvious reasons, is sign a deal and then not been able to fulfill it due to not been able to raise the neccessary capital. I would then be liable. It is a bit of a catch 22 scenario so any advice is appreciated.

Thanks in advance
J

Best thing is to approach the bank you've been with personally for many years. This makes your evaluation easier. Most likely they will want you to sign a personal guarantee for the funds too so it makes sense doing it with a bank you have a track record with.
If your matching the amount, and you have orders in place, this should tick the boxes for a loan. You'll still need a complete business plan alongside detailed numbers - at least 3 years of projections. And of course you still need to give your sales pitch to the person evaluating your application.

If they don't give it to you then shop around all the other banks and see who will offer you the best deal, but I don't see why they would refuse you given what you mentioned if you have a decent credit history.

j_lyon007

Deleted User wrote: »

Best thing is to approach the bank you've been with personally for many years. This makes your evaluation easier. Most likely they will want you to sign a personal guarantee for the funds too so it makes sense doing it with a bank you have a track record with.
If your matching the amount, and you have orders in place, this should tick the boxes for a loan. You'll still need a complete business plan alongside detailed numbers - at least 3 years of projections. And of course you still need to give your sales pitch to the person evaluating your application.

If they don't give it to you then shop around all the other banks and see who will offer you the best deal, but I don't see why they would refuse you given what you mentioned if you have a decent credit history.

I have been out of the country for a few years so unfortunately I don't have much of a history with Irish banks. I would be a bit reluctant giving a personal guarantee but suppose would have to think about that one. Doing up the business plan with projections etc wouldn't be an issue as its already done. My business partner has a good history with one of the banks here so perhaps that may work. It still leaves the issue of trying to get an answer from them either way by year end, but suppose should try set something up to see where we might stand. Potential problem is that we still don't have proof of heads of terms yet etc. Presumably the bank would need this before they can even consider our application, but we won't have this until we actually agree everything with the client, by which stage if we sign it, then we have given our commitment to the project, and thus then liable if we can't fulfill our obligations (raise the capital).

Duckett

First well done on getting to the final stages of landing the new contract. Great to see you have raised 50% of the capital. Its important your bank relationship is with an rm that understands and has experience financing the working capital needs of growth companies. If the answer to this question is no then you face a challenge with your existing bank. Above all deals like this need a fully functioning bank relationship that enables you get through the cash-flow challenges. It is important you share up front your situation with the bank i.e. discuss the deal terms before you sign contracts - better the bank is involved at that stage as you can bring them with you at each stage of the process. They can take risk but they prefer, in my experience, to be consulted before contract terms are locked down. They will always be primarily mindful of the repayment schedule and will want to be comfortable with stage payments, past and projected financials. they might even like to see the deal insured in some manner. Trade finance is best supported by a banker with trade finance experience. The percentage of your total revenues that this deal represents will be a factor, as will the quality of the debtor, where they are located, are there any Fx exposures, any existing debt overhang etc. So lots of moving parts here and they ideally should be discussed with the bank. They will naturally seek some sort of security, so you need to have an answer to this question - best if you can avoid PG's as that is not a trade finance banker's preferred option but it may come down to a mix ........ hope that helps in some way, best of luck

antoinolachtnai

What are you actually going to use the money for? Are you going to buy equipment? It is easier for banks if they are financing equipment or property because they can use it as security, either through a hire-purchase arrangement or a charge. They might also finance stock (the stuff you buy in from suppliers and the stuff you have made while you are waiting to ship it).

It is very important to understand the strength of your customer. They may seem like a big strong customer to you, but they may be heavily financially leveraged themselves. This makes your contract less valuable. (I am thinking of a particular landlord in Dublin whose tenant is a famous Irish company, a household name. The company is still very much a household name and a big player in its industry, but its financial situation has changed and the landlord's bank is no longer happy with the strength of the lease.)

Aside from bank finance, if you have significant strong suppliers, it is worth seeing if they will advance a few months credit. This might reduce the amount of bank finance you would require.

mneylon

j_lyon007 wrote: »

I would be a bit reluctant giving a personal guarantee but suppose would have to think about that one.

Unless you have a good credit history etc., with a bank they will require a personal guarantee. No guarantee = no money most of the time

j_lyon007

Thanks guys for the feedback, much appreciated. In relation to the the strength of your customer/client, they are a foreign bank so monies/invoices should be secure. Some of the investment will be for equipment but most will be in recruitment on short time contracts. It's pretty normal in this particular market. Thanks @Duckett, I hadnt thought of insuring the deal, certainly worth consideration and I agree that a banker with trade finance experience is who I need to get in front of. @Blacknight, still not really convinced on the PG scenario. I understand what you mean but I have seen people get badly burnt on this. Like most things nothing is ever 100% secure.

Again appreciate the advice here.

j_lyon007

Thanks guys for the feedback, much appreciated. In relation to the the strength of the customer/client, they are a foreign bank so monies/invoices should be secure. Some of the investment will be for equipment but most will be in recruitment on short time contracts. It's pretty normal in this particular market. Thanks @Duckett, I hadnt thought of insuring the deal, certainly worth consideration and I agree that a banker with trade finance experience is who I need to get in front of. @Blacknight, still not really convinced on the PG scenario. I understand what you mean but I have seen people get badly burnt on this. Like most things nothing is ever 100% secure.

Again appreciate the advice here.

mneylon

j_lyon007 wrote: »

@Blacknight, still not really convinced on the PG scenario. I understand what you mean but I have seen people get badly burnt on this. Like most things nothing is ever 100% secure.

You're asking someone to lend you money. They're simply asking you to share the risk.
If you don't have confidence in your ability to repay the loan then maybe you shouldn't ask for it?

antoinolachtnai

Just because your client is a bank does not necessarily mean it is financially strong.

Unlike your equity backers, the bank is not in the business of risk capital. They need a fairly high degree of certainty that you will repay and have to have good assets to go after if there is a problem.

If you have given away a fair chunk of equity I can see why you might not want to enter a PG.

j_lyon007

Blacknight wrote: »

You're asking someone to lend you money. They're simply asking you to share the risk.
If you don't have confidence in your ability to repay the loan then maybe you shouldn't ask for it?

To be fair I never said I don't have confidence in my ability to repay a loan, quite the opposite. I'm saying that I'm not totally convinced that a PG is right either, but not ruling anything out. Can I ask Blacknight do you have much experience in trade finance loans etc? If so, id be like to hear a little more. you can PM if you wish.

j_lyon007

antoinolachtnai wrote: »

Just because your client is a bank does not necessarily mean it is financially strong.

Unlike your equity backers, the bank is not in the business of risk capital. They need a fairly high degree of certainty that you will repay and have to have good assets to go after if there is a problem.

If you have given away a fair chunk of equity I can see why you might not want to enter a PG.

Point taking about a bank not necessarily been financially strong, but in this case I'm quite lucky that they are.

j_lyon007

j_lyon007 wrote: »

To be fair I never said I don't have confidence in my ability to repay a loan, quite the opposite. I'm saying that I'm not totally convinced that a PG is right either, but not ruling anything out. Can I ask Blacknight do you have much experience in trade finance loans etc? If so, id be like to hear a little more. you can PM if you wish.

I thought it was pretty standard nowadays to ask for personal guarantees if theres no assets to secure against the loan. Otherwise the risk is too high for a bank, they don't take a punt on things anymore. If it comes up in the bank meeting, to me you would have to accept it straight away otherwise your sales pitch is going to fall flat on its face.

mneylon

j_lyon007 wrote: »

To be fair I never said I don't have confidence in my ability to repay a loan, quite the opposite. I'm saying that I'm not totally convinced that a PG is right either, but not ruling anything out. Can I ask Blacknight do you have much experience in trade finance loans etc? If so, id be like to hear a little more. you can PM if you wish.

We've had several loans / finance deals from a variety of financial institutions over the last few years. I can't recall how many times I've had to sign a personal guarantee, but it's definitely more than once
And any time they were asking for one it wasn't an "option" - you either gave it or you simply did not get the money.

If you want to email me directly please do: michele @ blacknight.com

pedroeibar1

No PG invariably means no advance. It is more about showing your commitment to the project and keeping you focussed than it is about “security” to the bank – lots of escapees out there from personal guarantee situations.

The risk is you, i.e your newco’s ability to complete the project on time/quality/price. That could be covered by a ‘completion bond’ (often asked for in these situations) but those are difficult and not cheap & I don’t know if anyone is underwriting them in Ireland at the mom.

I don’t get the comment on trade finance – in Ireland there is no State Export Credit scheme (deplorable, but that is another topic.) What you have is a basic export of (I’m assuming) services given the recruitment/temp costs input. You can take out insurance for non-payment, but that would not be very worthwhile if the buyer is a bank in a developed country. If buyer is located in an underdeveloped/emerging market you should consider political risk insurance and also look at an irrevocable letter of credit.

Make sure there are no onerous conditions against you in the contract - e.g. a liability for consequential loss should there be a delay, alleged or other.

For your cash-flow what you need to consider is how best to structure the payment program; consider the dates for stage payments, with funds transferred after the credit period. Allow for a retention of say 10% of the overall cost to be paid within X days of contract completion. Make sure your contract has a clear dispute resolution / arbitration clause (some try to take the retention as a discount!). If there is a long credit period (unusual with services) you could consider a bill of exchange payment system and set up a bill discounting facility with your own bank.

@ Duckett - Are you thinking of a supply-chain finance facility?
That type of facility gives companies an agreed revolving credit limit to spend with their suppliers with a payback period of up to about 180 days. If the business takes an average of 90 days to cycle a “work module” from the date it buys “supplies” to ultimately get paid, a 250k facility would be the equivalent of an additional working capital of £1 million over a 12-month period.
I’m not sure that such a facility would be available because OP is a newco with no trading experience; also rates are expensive and in my experience the non-payment risk is insured, so no credit insurer would cover newco.

Duckett

I agree that a newco will face problems regardless of the funding needed. The question is more about the appetite of the bank to assist its new customer grow. A confirmed letter of credit from the overseas bank would be ideal but in the "real world" I have yet to see one ....... the next best is a letter of credit but again scarce unless the buyer is in an emerging market. An upfront payment would be nice but again unlikely.

We don't have a state backed export credit scheme but there are some brokers / commercial providers in the market however a newco or an established company for that matter will still find it hard to get cover on a single standalone deal. So the only option is to rely on the quality of the bank relationship and seek out an experienced trade finance specialist. We are missing lots of information - what sector, is it financial services or software or a manufactured good. How experienced is the team, is bank funding the right option here (a bank will ask if new equity can be raised and an answer to this should be prepared - is there a concern about possible overtrading - again an answer is required) ........

A debate here is interesting but without full details all the above comments are very helpful but no substitute for discussing the detail with i an experienced banker and have your RM to involve a specialist from the trade finance team in the discussion.

BenEadir

j_lyon007 wrote: »

Point taking about a bank not necessarily been financially strong, but in this case I'm quite lucky that they are.

If the client bank (presumably) know you and your partner are setting up a NewCo to deliver the project for them is there any possibility they would assist with your working capital requirements? This could be via a combination of payment of a project engagement fee (e. g. 20%) on signing contacts and early payment terms e.g. fixed weekly stage/progression payments.

Most large companies understand that awarding a large contract to a small or start up company will create working capital challenges for them and it is in their (the clients) interest to ensure the newly appointed supplier has sufficient finance to deliver.

At the end of the day the client bank will effectively be part funding their own project which should be a win:win for both parties.

If a client bank can't part fund you, who can?

pedroeibar1

Sorry Duckett but that is a load of …. Things need to be kept simple at this stage. The OP's issue is provision of working capital, not credit risk.

Talk of an ILC is meaningless in the situation proposed – supply of services, as indicated by the comment on staff costs. How do you suggest OP (or the buyer. a bank) structure an ILC? How daft is it to ask a bank for an ILC drawn on itself? Furthermore, talk of a “confirmation” is meaningless, it does nothing other than obtain a third-party bank guarantee an already credit-worthy (as stated) buyer. Waste of money.

I suggest there are several insurers operating here who would write a single risk services policy (out to 36 months), either with contracts or supply cover (cover incepting from date of contract or from date of provision of service) but it would require a proficient presentation by OP & broker. Difficult, because most of the brokers in Ireland would be out of their depth on this (or certainly out of their comfort zones) and would rely on support from parent office to place the risk. (Danger is they would rely on BS and it would fail….) But that is not an issue with a creditworthy buyer, we are back to CASHFLOW.

As for the suggestion of talking to an experienced banker………..No Irish bank cares about seeing its customer grow. All they are interested is self-preservation, they might budge a little if a good customer of long standing seemed to be interested in moving to a competitor, but in this market they are running s#1t-scared and most are clueless; the foreign ones are equally scared, most have pulled out or have run for cover. My recent (a few years) experience of banking in Ireland - the better people are gone overseas or into industry.. Of what is left, nobody is going to shove a dodgy proposal up the line, it’s a case of CYA, keep the head down, wait it out and maybe get the pension funded a bit more before a pay-off. All they can do, just about, is plain vanilla mediocrity.

Binn Eadir above mentions a deposit – we don’t know the size of the contract or its details, but a medium term (less than three years) contract of this nature would call for a certain amount of front-ending, but not if it is a bank buyer and especially not if it is supply of services as there is little outlay on materials (as said by OP). I disagree with the suggestion/feasibility of the buyer bank funding its own order – that’s double jeopardy and would never happen!

OP has been out of Ireland, is new to the scene and has not yet even got a heads of agmt/MOU. Even with that sorted it would be a “pound the pavements” task to raise the cash and probably require finance from a second-tier lender, or additional private investment. And we don’t know if the margin is there to absorb that……

antoinolachtnai

There is a possibility that the OP may well not have the balance sheet to successfully carry out this work. If this is the case, he will have to box clever somehow. A way to do it would be with the strength of a larger player who would supply the services needed from its own pool. I can't see a second-tier lender doing it, because the return in real terms (as opposed to percentage terms) would probably not be big enough, given the relative complexity of the deal.

BenEadir

pedroeibar1 wrote: »

Binn Eadir above mentions a deposit – we don’t know the size of the contract or its details, but a medium term (less than three years) contract of this nature would call for a certain amount of front-ending, but not if it is a bank buyer and especially not if it is supply of services as there is little outlay on materials (as said by OP). I disagree with the suggestion/feasibility of the buyer bank funding its own order – that’s double jeopardy and would never happen!

Man, that was verbose.

Two points:-

1. OP said the Working Capital is mostly needed for sub contractors. I know that technology and pharmaceutical companies have certainly assisted temp agencies front end the heavy working capital burden of taking on a load of contractors who need to be paid before the the normal invoice cycle would provide funds. It's worth pursuing if local sources of finance don't work. At that point there is nothing to lose is there?

2. You're not using the term "double jeopardy" in the wrong context. Double jeopardy is "A second prosecution for the same offence after acquittal or conviction."

pedroeibar1

BenEadir wrote: »

Man, that was verbose.

Two points:-

1. OP said the Working Capital is mostly needed for sub contractors. I know that technology and pharmaceutical companies have certainly assisted temp agencies front end the heavy working capital burden of taking on a load of contractors who need to be paid before the the normal invoice cycle would provide funds. It's worth pursuing if local sources of finance don't work. At that point there is nothing to lose is there?

2. You're not using the term "double jeopardy" in the wrong context. Double jeopardy is "A second prosecution for the same offence after acquittal or conviction."

Really helpful.:rolleyes: If you want to be pedantic about it you should broaden your reading.

Jeopardy = danger, threat, hazard, risk.
A bank employing a contractor and lending to it doubles its risk.

You should also brush up on the Criminal Procedure Act 2010 also before you start pontificating.

OP has yet to respond on recent posts so the ball is in his court and goodbye to you.

j_lyon007

Guys appreciate the advice and comments here. Due to the nature of the project I am under NDA so apologies but I can't give out any more info that what I already have. Most of the comments/issues raised were ones I had gone over myself but its good to hear other opinions. I would like to reply to each one individually but I just don't have the time. Thanks too for the PM. I have set up a couple of meetings for next week with 2 lenders here in Ireland, which should give us an indication of where we are and what we may need.
Cheers guys and less of the ponificating

BenEadir

pedroeibar1 wrote: »

Really helpful.:rolleyes: If you want to be pedantic about it you should broaden your reading.

Jeopardy = danger, threat, hazard, risk.
A bank employing a contractor and lending to it doubles its risk.

You should also brush up on the Criminal Procedure Act 2010 also before you start pontificating.

OP has yet to respond on recent posts so the ball is in his court and goodbye to you.

Oooohh who took the jam out of your donut

pedroeibar1 wrote: »

Jeopardy = danger, threat, hazard, risk.
A bank employing a contractor and lending to it doubles its risk.

You're a funny guy Pedro, my suggestion was for the bank to make a substantial payment on engagement and weekly stage/progress payments. On what planet does that equate to "lending"?

What does http://humanrights.ie/announcements/double-jeopardy-and-the-criminal-procedure-act-2010/ have to do with the OP financing some working capital?

Also, you might find this useful - http://bit.ly/1ydCD7R

pedroeibar1

j_lyon007 wrote: »

...... I have set up a couple of meetings for next week with 2 lenders here in Ireland, which should give us an indication of where we are and what we may need.

Best of luck with them. It will be interesting to see their approach, I'm guessing an ID facility.