Praetura Commercial Finance Sales Director Tom O’Dell offers advice for your SME clients and dives into the overlooked power of headroom in your facilities.
The UK economy continues to battle a series of economic headwinds. Growth is difficult to predict and often underwhelming. Input price pressures and productivity challenges continue to push core inflation upwards and, combined with interest rate rises, we continue to see a volatile trading environment for UK SMEs.
Thought leaders define this period as one where resilience and adaptability are king.
As such, each SME’s ability to pivot and grasp opportunities will be the ultimate differentiator between who will survive and who will thrive through this next chapter.
Being nimble is not a new idea. Many will point to examples where ‘a pivot’ is more obvious, such as significant changes to marketing strategy. However, to be truly adaptable the entire organisation must remain responsive. And that actually starts (and ends) with the finance department.
But how do MDs and FDs stay agile when it comes to funding?
Headroom in cash flow is the single most powerful tool to enable opportunities to be grasped. It can be the antidote to unforeseen cash flow pressures and provides both options and opportunities.
Headroom can be the fuel that develops relationships with key stakeholders. For example, headroom can help ensure a key supplier is paid early. Or, headroom can be used to support a customer trying to make ends meet through more lenient terms. Deepening and improving existing relationships for the future, will pay dividends down the line.
Headroom can be used to weather storms. Profitable businesses can often fail due to a lack of available cash flow. Increased headroom de-risks a business from this challenge, but also helps MDs and FDs make better, long-term, strategic decisions versus decisions dictated by near sighted cash flow demands. More widely, it allows finance departments to exert choice and control over their day-to-day operations.
Headroom also allows businesses to make quick and bold decisions to take advantage of opportunistic moves. Ultimately, the ability to act quickly, making purchase decisions about strategically valuable assets can be a big advantage for a business. Being in the right place, at the right time with access to capital can help strengthen a company’s market position during what is a challenging time for many.
At Praetura, headroom is a key part of how we underwrite a new deal too. The more headroom we can provide, the more power we are giving management teams to deliver on their plans. Of course, it’s not completely altruistic. Headroom reduces risk in our own facilities, but we come at this question from management’s side of the table first – what do they need to succeed?
To really get under the skin of this, we perform a greater level of due diligence at the early stages of a deal than most. We do this by bringing in underwriters as early as possible, so that we can give real, deliverable terms with excess headroom quickly. It also means that where appropriate, we say ‘no’ faster for the benefit of the business. Unfortunately, too many lenders present terms and then look at the detail afterwards, creating uncertainty on a transaction that all parties thought was completing. Or, even worse, walking away at the eleventh hour, leaving companies scrambling.
When considering opportunities, we will look to the whole of the balance sheet to maximise funding (and therefore headroom). We do this by leveraging our ABL expertise, providing facilities against plant, stock, property and cash flow as well as the more traditional book debt advance (invoice discounting). In so doing, we ensure that our client’s use the right form of funding for the right reasons. For example, would a revolving inventory facility to fund a working capital need suit a company better than an amortising loan that uses cash over time?
Where feasible, we will also collaborate with our other Praetura Group partners to ensure the funding provided is right for that business. It’s about viewing the business as a whole and using tools like headroom to help it reach its goals.
The SME finance landscape has changed significantly in the last few decades, and our approach to debt has become more nuanced. We see lending as a partnership not just a transaction, and greater headroom can often act as a great ‘prevention over cure’ tool for finance departments.