Despite the current economic climate, the banks are still willing to lend money, provided small businesses have a sound business plan and their balance sheet is not over extended.

Deals are still getting done, but at a slower pace, higher price and at lower volumes. Banks clearly have concerns about the economic outlook and how this will translate into increased levels of bad debts. Also, despite the Government re-capitalisation of certain banks, there are still bank to bank lending issues. As a result, the banks continue to ration lending and this is likely to continue for at least the foreseeable future.

Businesses need to react to the trends in the market and consider alternative financing arrangements to take their businesses forward.

More Club Deals

One way in which a SME could secure money is by obtaining funding for two or more banks ("club deals"). It is likely for larger acquisitions that club deals will be the most likely funding structure given that the syndication market is almost at a standstill. Banks are unlikely to want to underwrite the entire credit risk on larger deals and the banks will be keen to spread their risk. Even for general funding we see that bank clubs will become increasingly popular as incumbent banks may not have the appetite to extend or continue existing funding lines.

Increased Pricing

There has inevitably been a decline on the more favourable funding terms available in 2007 and early 2008. Banks are increasingly focussed on achieving the right returns on capital and in the current market this has meant higher pricing and shorter lends. On the acquisition finance side, this has also affected the amount at which the banks are prepared to lend on a cashflow basis.

Banks are also more interested in the over-all returns they receive from their relationships. It is also likely that facilities which are available but not being drawn may be withdrawn.

Businesses need to react to the trends in the market and consider alternative financing arrangements to take their businesses forward.
With regard to hedging, many businesses are currently having to pay fixed interest at well above market rates under hedging investments entered into over the last couple of years when LIBOR/Base Rate was much higher. In some situations such hedging investments can be re-structured to the corporate's benefit, but this is not always possible. There is though, a "flipside" to this - with interest rates at historic lows, now is a good time to take out new hedging terms.

VC Funding

There is still some potential in the market for venture capitalists to fully underwrite acquisition finance deals without bank funding being in place on completion. The venture capitalists are only likely to provide this "equity bridge finance" if they are comfortable that they can refinance with the bank later or (less likely) the venture capitalist is happy to provide longer term debt. In any event, this deal structure is only likely to apply to certain deals and for most other deals, debt funding will need to be secured on completion.

Asset Based Lending

Credit constraints have made it increasingly difficult for the firms to obtain finance from traditional funding methods. It is likely that the asset based lending industry will continue to provide an important role in supporting businesses during the recession. To secure finance, businesses may need to speak to asset based lenders to obtain funding.

Dialogue with Banks

Funding is still available for businesses provided they have a sound business plan, albeit it is likely to be at a higher price and on less favourable terms. Businesses should consider whether to bring another bank on board as well as their incumbent bank, especially if the incumbent bank does not have the appetite to extend or increase the current facilities.

More than ever, businesses need to be speaking to their banks and other funders, well in advance of their facilities coming to an end, in order to ensure that future funding is in place. SME owners need to be sure that they produce management accounts, cash-flows and forecasts in a timely manner and ensure that those are based on reasonable assumptions. If a business is showing signs of struggling it is far better to begin a dialogue with the bank at an early stage rather than leaving it too late, which may reduce the bank's options. An early stage dialogue will allow the bank to consider a wider range of options and should ensure a firms' survival.

Shaun McCabe is a member of the Banking Team at Browne Jacobson. For more information visit www.brownejacobson.com