Out of favour with your bank? Need a Business Loan?
Whole industries can fall in and out of favour with banks from time to time. What happens to a small business when the banking sector falls out of love with an industry and finds itself on the wrong end of a bank exit strategy as a result?
The current industry out of favour now is, not surprisingly, the mining services industry. This is typically an equipment heavy sector reliant on bank support to fund equipment and working capital. Often too in this sector labour costs are high – particularly in the more highly specialised segments of the industry – putting pressure on working capital already depleted by the monthly demands of equipment finance commitments.
This month’s case study illustrates how debt facilities can be re-structured to free up businesses in out-of-favour industries find their feet again.
Industry Engineering Services
Business Stage Debt Restructure
The client ran an engineering services business specialising in anti-corrosion applications for maritime, mining and construction industries.
During the mining boom, the business had become heavily relliant upon mining sector clients, however with the downturn in that sector, revenues in the most recent financial year fell significantly.
The business accumulated ATO arrears during this period and as a result lost the support of its bank following its annual review.
Bank facilities included equipment finance, a term loan and an overdraft. These facilities were secured by the business owner’s residence, the premises from which the business operated, plant and equipment and other assets captured by the banks GSA.
The business needed financial support – including a capital injection – so that it could refocus away from the mining sector and more upon its civil engineering, construction and maritime industry clients.
The bank was asked to release debtors from its GSA – the bank however refused.
The lender – in conjunction with the referring broker – negotiated a complete payout of the bank. This was planned as a two step process.
In the first step, then lender wrote one cheque to payout the bank entirely. In addition a debtor finance facility was provided to provide the additional working capital the business needed to execute on its turnaround strategy.
With the bank (and ATO) paid out, and associated pressures alleviated, the business was able to focus on repairing its revenues.
Once revenues and profitability have been restored, the company will be able take the second step in the debt restructuring process and refinance the property and equipment secured debt back with traditional lenders at competitive rates.