The banks are back in the lending game

By Wright Communications

I am often asked if the banks have returned to the market after their exit from the business sales arena once the recession hit.

The reason for their exit from the market were obvious, it was a financial institution-led meltdown after all. Their withdrawal made things very difficult for anybody involved in business to gain finance for anything, let alone a business purchase.  To add to this, we had the complete meltdown of the finance company and/or mezzanine finance industry.

The banks went into lock-down mode and leant only, for the most part, to existing customers. If they did look at a new business, they required two clear methods of exiting the loan. In simple terms, the business and its assets, and equal cover in personal property or something similar were needed.

There also become a very clear emphasis on the purchaser, his/her history, his/her suitability for the business and benefits he/she could bring to the business going forward.  The credit department of the bank looking to lend on a particular deal almost became like recruitment agents for that transaction.

This was all very problematic for purchasers who were used to being able to finance up to 100 per cent of a transaction on a good solid business that had verifiable future earnings. It didn't really matter if you had experience, as long as you could pay back the money you were in.

Cash flow lending was the trendy term that was trotted out in the early 2000s. This was where a bank would lend on a transaction based on its past cash flow and secured by GSA (General Security Agreement) on its future cash flow.  There was often no other security required by a purchaser for these loans and, as you can imagine, these were the first to go once we entered recession.  A recession impacts all companies' cash flow because consumers and businesses stop spending, so I would expect that these type of loans were the most at risk of failure over the last couple of years.

Well, great news, the banks are back in the lending game. We have even completed our first cash flow lend transaction in almost two years. It was a significant business where the purchaser had $1m of equity in a $5.8m transaction. The vendors left in about 10 per cent, but the banks (there were two competing for the deal) made up the rest. The purchaser had no other security to offer the banks and their security was a GSA on the business. We have another two underway where finance is approved. One is an offshore party who has $3m of equity to put into an $8m transaction and the other is a purchaser who has $1m to put into a $4m transaction. On all of these transactions there are at least two banks competing for the deal.

There are two major shifts here. Firstly, the requisite loan to equity ratios have softened dramatically. Last year a purchaser had to put in at least 50 per cent to even be in the game. But in the above examples, we are as low as 80/20 per cent loan to equity ratio. That is a dramatic change. And secondly the banks (plural) are competing again. It was our experience that over the last year there was only one bank that was consistently trying to grow their book and that was the BNZ.

This is obviously great news for us as brokers, but is even better news for business owners who might be looking to exit or purchasers looking to buy. I have often said that a business is only worth what a bank is willing to finance. A little simplistic, I agree, but a very real phenomenon over the last couple of years.  Hopefully this might motivate some business owners to investigate the possibility of exiting their business. The market seems to be turning and the banks have re-entered the lending game. Halleluiah!


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