Debt Advisory is a service that considers and assesses the total debt requirements of a business and offers strategic guidance from financing partners with deep market experience.
Debt Advisory provides independent advice, professional proposals and lender engagement brokerage for situations such as capital expenditure, refinancing existing loans and improved structuring of existing liabilities.
What's Your Story?
Understanding the business owner’s story is often the best place to start. What are the drivers, challenges, opportunities, successes, and failures the owners have faced and are facing?
Next is the business story. A debt advisor will seek to know all the ways the business generates revenue and the quality of each revenue stream. Has revenue changed over the lifetime of the company, and are there future risks that need to be addressed today? How has the industry sector developed, who are the main competitors and what opportunities are on the horizon?
There should be a natural alignment between the owner's story and the business story. A strong business will have a rich story, or the beginnings of one.
Good Debt Management
In the simplest terms, debt can either be good or bad for a business.
Good debt, obtained for property, growth needs, or to acquire business assets, will be sustainable when structured correctly with reputable lenders and terms and rates appropriate for your business.
By contrast, inappropriate debt is typically short-term with higher interest and can create more problems than it initially solves.
Key Balance Sheet Metrics
A business’s balance sheet is a body of work developed over time. As such, it provides insight into the strengths and weaknesses of the business.
Signs of a strong balance sheet include income-generating assets, good liquidity and more debtors than creditors. There will be evidence of working capital consistently used to fund operations, with a balanced equity-to-debt ratio. Receivables are collected within a time frame that supports prompt payment to creditors and ensures a continued supply of inventory. A robust working capital position will sustain future growth.
Key Profit Metrics
All debt needs to be repaid over time. Additionally, commercial debt often includes lender covenants that require maintaining revenue metrics and dividend distributions.
Revenue needs to be sustainable and reflected in both profitability and cash flow. There will be evidence of loyal customers, recurring income and long-term contracts. Along with existing revenue sources, new income is being generated from sales to new customers.
A lender will seek to see that there is cash available to retire the debt, along with a contingency plan to mitigate an unexpected drop in sales or debtor defaults. Ultimately, a responsible lender wants the business to thrive and to work in partnership to provide more funds in the future.
Financial Statements Consistency
Lenders often compare financial statements over similar periods, such as year to year or quarter to quarter. Cash flow forecasts should clearly link to historical business data, and assumptions should hold up under scrutiny.
Consistent equity and profit levels indicate that a business is positioned for growth and can fully utilise the debt it receives to maximise value.
Business Hygiene Checks
Debt Advisory will help prepare your business for debt by assessing the areas of your financial operations where lenders require transparency. Best practices include timely payment of superannuation and BAS tax obligations, sound bookkeeping, and current annual reports that are readily available.
In addition, any overdraft facilities and business credit cards will, in the best-case scenario, be underextended, with repayments well above minimum levels. Any existing debt will be managed effectively to streamline possible debt restructuring.
Are you ready for Debt Advisory?
If the business tracks well across these areas, the next step is to see how a Debt Advisory Finance Partner can support you.
Even if there are areas that require mitigation, a professional debt advisor will take the time to prepare your business to be in a better position.
In both cases, debt advisors will assist you in building a strong financial team that will support the business year-on-year with independent advice and a strategic plan to acquire sustainable debt that supports business objectives.