Most of us – be it as an accountant, tax practitioner or financial adviser – finance business growth through cash flow, a mortgage or an unsecured bank loan. But the later is really hard to get.
How To Finance Business Growth
We asked Jeff Zulman of Trailblazer Finance to tell us more about the options we have. How do we finance business growth? Here are 12 things we learned.
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# 1 Selling is not always the answer
Sometimes a sale is the right answer. But very often you are making that sale because you see no alternative. You can’t get the capital you need to grow the business.
If you could get the capital by securitising the asset, then you didn’t have to sell. Instead you could keep the asset, grow your revenue and repay the loan out of cash flow.
# 2 Banking is not always the answer
When you ask a bank to finance your business growth, they usually say, “Give us your home. Give us your personal family asset.” And if you don’t want to do that, you run out of options.
There are many professionals who have rich cashflows but can’t borrow. Since banks don’t understand the industry enough to take the risk.
# 3 Recurring cash flow is an asset
The recurring cash flow in your business is an asset that can be securitised and monetised. The aim is to get the capital you need to grow. And then have the resulting increase in cash flow facilitate repayment of the loan.
# 4 No default means it is working
The fact that Trailblazer Finance has had no defaults so far took us by surprise. We hadn’t thought that was even possible.
That a lender secured by business cashflows and no hard assets such as bricks and mortar (unlike a bank) could have no defaults. This is probably the best proof that unlocking the value in business cash flows works.
# 5 Sandwich the loan
Banks often form a syndicate for large loans. And that is also what specialist lenders often do. Part of the money comes from the specialist lender. Part is third party. And part is the bank’s.
That spreads risk but it also allows the specialist lender to make loans that banks can’t make. They just don’ have the underwriting discretion that a specialist lender has.
# 6 Three buckets for financing business growth
There are three reasons a practitioner might seek growth finance. A practice might ask for capital to finance
a) inorganic growth – the practice makes an acquisition to grow
b) organic growth – the practice needs working capital to accelerate growth
c) get through distress – the practice needs to get around a hurdle to grow
# 7 Multiples
The ultimate price of a practice depends on many factors. Each practice is unique in its own way. But here are current average multiples as a rough guide.
Multiples for financial planners used to be around 3 to 3.5 times recurring revenues and have come down to 2 to 3. Mortgage brokers have come up from 1.5 to 2 times trail income to around 2 to 2.5. And tax agents sit around 1 to 1.2 times revenues.
# 8 Financing organic growth can be less risky
We would have thought that financing an acquisition is a less risky loan than financing working capital. But it is actually usually the other way around. And the reason is that many go into an acquisition with too high blue-sky expectations. They underestimate the costs of integrating the new business. A high percentage of acquisitions never produce the fruit that is expected.
Organic growth on the other hand gives the practitioner the chance to learn and develop a proven model. And then accelerate the growth of that proven business model. As a result financing organic growth is usually less risky for the specialist lender than financing acquisition.
# 9 Involve the specialist lender before the acquisition
Timing is important. Only take up funding after you have reached a certain level of maturity. It takes time for clients to come back and create a track record. A good track record reduces finance costs.
But when you are ready to make an acquisition, talk to a specialist lender before you buy. The lender has an active interest in making sure that you make a good acquisition. And they have a unique insight into the market.
# 10 Seek Balance
Balance is best. When you look at your client list, seek an even distribution of clients. Try to have an even percentage of client who have worked with you for less than 2 years, 2 to 5 years and longer than 5 years.
# 11 We make good credit risk
Most of us have grown our business from zero. We care about our reputation. We are professionals. And all this makes us a good credit risk to the right specialist lenders.
You sometimes get a bad apple but by and large they are a very ethical group and that’s been 100% my experience – Jeff Zulman.
# 12 Come prepared
If you want it, show it. Do your homework. Answer promptly and honestly. Treat the specialist lender like your best client.
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Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s personal circumstances.