As the credit crunch nears its one-year anniversary, the doom-mongers have been vindicated. Billions have been wiped off the value of UK banks and, despite falling Bank of England interest rates, the cost of borrowing has soared due to increased risk of default.

Paul Holohan of the UK’s Richmond Capital Partners says the turmoil has inevitably impacted heavily on corporate lending. “We believe that 2008 will be tough, with financial institutions requesting stricter terms for loans and with even tighter covenants on cash-flow funding,” he says.

However, despite the tough market conditions, there remains an appetite for lending, as Marcus Clifford of BPIF McInnes Corporate Finance explains: “There has been a tightening up of the credit markets, but the right business will still attract funding. Lenders need to lend and money needs to move.”

He admits the downside of this is that businesses that may have been borderline in the past will struggle to get the funds they need today.

This view is supported by Simon France, who heads up HSBC’s print finance division. “For us, it is business as usual. We have a strong balance sheet and are carrying on as we did before, lending securely against strong assets,” he says.

Over the past decade, a real funding gap has opened up at the lower end of the financing spectrum. Traditionally, private equity houses invested in SMEs across a variety of sectors, but over the past 10 years there has been a gradual shift away from the smaller investments, with houses favouring fewer and larger investments. During the last recession, a lot of private equity houses and banks that had money tied up in print got their fingers burnt and have been unwilling to return to the industry.

Prior experience
The upshot of this is that print has been in something of a credit crunch since prior to the turn of the millennium and so has not really featured on the radar of many lenders, according to David Bunker, business development manager at Close Print Finance. “The printing industry has been going through its own squeeze for the best part of a decade now and how the credit crunch translates in our industry is largely up to the attitude of bankers,” he says.

This funding gap has, to a large extent, been filled by the rapid growth of asset-based lending and other alternative financing methods, such as invoice discounting. The good news is that these avenues are considered safer shores by the banks and, as such, are not as affected by the credit crunch as pure-debt financing.

Statistics from the Asset Based Finance Association show that the industry has advanced a record breaking £16.2bn ($AU33.5bn) in quarter one of 2008, citing the more ‘protective’ stance firms are taking during today’s turbulent economy as a key driver of that growth.

While it is certainly harder, and in many cases more expensive, to raise money, there is still liquidity in the markets. In a tougher market, companies will naturally have to try harder to raise the funds and adapt to the harsher conditions.

Former Close Print Finance managing director Murray Booker recently set up BPFL Limited, a broker for print funding. Surprisingly, perhaps, he believes that this is the perfect time to launch his venture, as being a broker he can access a wide scope of lenders.

Booker believes the credit crunch has meant that banks are returning to the traditional risk-based financing system – not necessarily a bad thing considering the millions lost to the sub-prime crisis when lending went haywire. As a result, he says printers seeking funding will have to reduce the risk of their proposition to make themselves more attractive.

“Printers have to make the deal more secure,” he says. “The cost of borrowing is related to risk. It may not always be practical, but if you can offer a bigger deposit or shorter term, the deal will be more attractive and incur a lower interest rate. The safer the lender feels, the more likely it is to invest.”

Staying within limits
However, it’s not only lenders who must mitigate risk. Print companies looking to receive finance must also ensure that, as the cost of borrowing rises, they do not over-stretch themselves. Bunker says that fixing the cost of borrowing is a good place to start, as it traditionally offers long fixed-rate terms so the client is not hit by any hike in interest rates.

“It also helps if you keep the borrowing spread between different banks,” he says. “For example, if you use one financial institution for asset finance and a different one for overdrafts or invoice discounting and for any factory mortgage, you can reduce your ‘over-exposure’ to one bank, which could quickly change its attitude to print.”

Holohan says that when seeking funding, it is important to have good advisers who understand the industry. Those with experience in the industry will also have good contacts with relevant funders and will be able to give informed advice on how best to approach each party.

Booker agrees: “When we are looking at projects, we match the risk with the lender’s appetite, constantly reviewing who we deal with.”

The message from the market is clear: finance is still there for the right business with the right proposal. It may well be more difficult and more expensive to obtain funding, and we have lived through a period of unprecedented cheap debt, but this is not necessarily a bad thing.

As David Bunker concludes: “Since our inception 21 years ago, we have been through one economic downturn with many of our customers. So, for us, it is business as usual. In addition, with the recent reduction in capacity in the industry, there has been a visible improvement in some businesses and a repairing of balance sheets.”

TOP TIPS: RASING FINANCE
• It is possible Despite the market turbulence, banks are still lending, although credit is more expensive than it has been over the past five years
• Make the deal more secure Minimise risk. If you can, place a higher deposit with the bank and shorten the loan term
• Spread the risk Don’t take all your eggs from one basket – banks can be fickle, especially in harder times
• Choose the right advisers Professionals in the industry will have the right contacts and be able to guide you better than others
• Use your assets Asset-based lending has come of age recently and unlocking the equity in your kit may be the best route to finance

Read the original article at www.printweek.com.

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