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Backdrop
Despite recent base rate cuts by the Bank of England’s Monetary Policy Committee (‘MPC’) to a new low of 0.5%, obtaining bank funding for new opportunities remains difficult. The majority of banks operating in the healthcare market have been quick to reiterate that they still regard the sector as
attractive, and that there is an appetite to lend.
However, the hurdles that accompany new lending applications combined with the cost of funds for new loans are now discouraging operators of all sizes from obtaining the growth capital they would previously have sought more readily.
The cost of new borrowing has not fallen in line with the falls in the base rate as the banks require a higher return, or profit, on their funds. LIBOR remains at a premium to the base rate, and together with other sources of funding (for example Government preference shares at 12%), the banks’ internal costs of funds are significantly higher than the base rate. This is reflected in their pricing.
Current financing issues
In recent months we have heard of a number of situations where banks have been able to change the rates and conditions of a loan. Examples include:
- Breach of financial covenants due to lack of management accounts, leading to punitive interest rates being applied;
- A tax saving restructure being cited as a reason to alter base rate to LIBOR and to charge a further arrangement fee.
The requests for more timely financial information from banks looks set to continue for the foreseeable future. As a response to increased scrutiny from banks, Hazlewoods have recently undertaken outsourcing work for a number of clients who do not have the financial infrastructure to provide the detailed management accounts required by the banks.
Alternative finance
Other, less conventional sources of funding have become more popular for clients as traditional funding has become more difficult:
- Asset finance on new equipment is being utilised instead of being paid from cash flow;
- Deferment of corporation tax via the ‘Time to Pay’ scheme can free up cash, with low interest costs;
- Operators are trying to improve their working capital management by requesting fees be paid in advance;
- Selling minority interests to private equity.
How to get the best new finance / refinance deal
The key to obtaining the best rates and levels of funding is to ensure banks have all the information required from the outset, in an appropriate format.
We recommend that a business plan be prepared, which should include as a
minimum:
- History and background of the business;
- Details (including plans, assessment of needs, quotes) of what the funds are required for;
- Historical statutory accounts;
- Full management accounts for the year to-date, including summary key performance indicators (such as occupancy, wages costs as percentage of fee income, etc);
- Thorough financial forecasts including integrated profit and loss account, balance sheet and cash flow;
- Details of key staff members, including CV’s.
Hazlewoods have extensive experience in assisting with the preparation of business plans and subsequent negotiations with funders in this regard.
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