Credit providers have become increasingly focused on understanding what drives behaviour and credit risk in specific industries, and setting lending policies accordingly.
There are now a number of established policy guidelines across traditional service industries such as Real Estate Agencies, Financial Planning, Finance Broking, Insurance, Legal and Accounting.
If you involved in these industries, funding can be a good option for growth (acquisitions etc) or to help in building succession planning.
In Focus - Accounting
The demand for accounting businesses has increased significantly in recent years. There are a number of perhaps obvious reasons for this, including the availability of credit and demand led factors including a relative shortage of targets to acquire.
In addition, firms often have excess capacity and are chasing a better recovery of fixed overhead costs, they may have a need to acquire talent or buyers might also be looking to expand into new services such as financial planning.
Lender Appetite - Accounting
Banks like lending to accounting businesses. Especially ones without reliance on one key partner/owner. This is due to the typical nature of recurring revenues which builds confidence on the continued ability to service debt.
In terms of participants, three of the four major lenders, plus other providers such as Judo Bank, Macquarie Bank, Bank of Queensland etc. have policies in the category.
Smart Debt Strategies
Whilst accounting firms can be great with advice for other people's money, the old adage about the mechanic and his own car rings true, as they often don't get across the detail. Success in borrowing money often looks like:
- Match the loan term to the period in which the benefit is generated.
This is especially true for acquisitions or expansion. Whilst we like to think that the benefit generated by the funding will sustain forever, the reality is different. A longer term P&I facility is usually a better option than an interest only term, followed by aggressive amortisation.
- Consider the security profile and how its links to credit terms.
One of the positive things about borrowing in Professional Services, is the ability to borrow without tangible security such as property or varying levels of guarantees etc. Just make sure you stress test the impact of the security provided in term so fits impact on price and/or terms.
How much can I borrow?
Credit criteria varies between lenders of course. Lender philosophy has emerged and has moved beyond just the traditional Interest Cover basis.
After this, it is important to determine what the actual income is to use for loan servicing. Yes, most of us are familiar with EBITDA, but what about adjusting for a market salary for the owners? When putting in a market value of the Owners' contribution this can change this number materially. This is what we call "EBITDAO".
Once the income is normalised, borrowing limits are generally based on the following guides:
1) Maximum loan amount to be less than around 2.5 - 3.25 times EBITDAO
2) Interest Cover Ratio ("ICR") of more than 2.25 times
3) Maximum loan amount to be less than Enterprise Value (Sometimes 70%)
Lastly - it is not just the size of the Revenue/Earnings but the quality of it. The latter will drive the attractiveness for both lenders and prospective buyers too.
Criteria does vary widely and is emerging very quickly now and into the future.