March 25, 2017

What loans are worth taking, and which to reject

April 18, 2013    BanksРаспечатать эту статью

What loans are worth taking, and which to reject

Tips for the business owner from the banker.

At first, few people are attracted to the idea to take a loan and along with it – debt obligations. It is much more profitable to be independent from banks and invest in a company only their money. So acquired confidence in the future and a peaceful sleep. But really – it’s just an illusion of stability.

If a business has growth potential and does not implement it, competitors will try to push your business to the market. Even if you have enough previously achieved, it will not add them leniency. The society in which we live has an impact on us. For business, it means that you can not ignore the actions of competitors.

Every entrepreneur has their own idea about how to improve the business and make big profits. Someone who has more appetite for risk, take advantage of the credit for the development of business, thereby weakening the position of competitors. After getting investment opportunities and to upgrade equipment (which leads to an improvement in the quality of goods or services), and for the expansion of the market (with a consequent increase in market share).

But the fact that you are using the loan funds, does not guarantee you will get benefits. A credit to the wrong order can lead to a deterioration of the financial situation of the company. These effects are almost impossible to predict in advance. Only after a while it becomes clear who exactly – you or your competitors – was able to make the best business plan, find a proper purpose, who consistently went to the goal and more efficiently invested money.

So whether or not to take the credit, and if so – how much? There can be no general rules. In different industries can be a big difference in the comfort level of debt. Favorable level for example, grocery chains will be the ratio of net debt (net debt here – the amount of short-term and long-term debt on loans and business loans with less available funds in the accounts and in hand), and EBITDA at a ratio of 4:1. This means that net debt can be up to four times the annual profit. For capital-intensive companies will be acceptable level of 3:1 to 2:1. The size of the optimal parameter affects the current situation of the enterprise, business acumen of its leaders, trends in the economy and business strategy.

After the end of the crisis, companies engaged in optimizing the structure of the loan portfolio, reducing this rate, refinancing and extending the debt. During the stability of the economy, large organizations can sell their shares and send the proceeds to pay off debt or to expand the business. Small and medium-sized businesses do not have this capability, so they need to seriously and in detail to think about every decision that is associated with the assistance of outside money. With the help of credit your business can generate more revenue and strengthen its position in the market struggle, but at the same time, there is a risk due to these credit facilities to undermine the position of the company. What could be a mistake if you take the credit?

Unnecessary purchase

Psychologically “wrong” it is easier to spend money than earn their own. This leads to the risk of wasteful spending borrowed money. Often bought necessary at first glance things that really will not affect the increase in profits, and sometimes vice versa. For example, the hiring of a large number of employees, secretaries, purchase expensive furniture and office equipment and other non-priority expenditures in the early stages can lead to a significant deterioration in the financial condition of the company. Usually later becomes apparent that it was not necessarily do it all.

Sales and marketing is not the first place

It is risky to invest in the expansion of capital assets – for example, to purchase equipment to increase production – not entering into preliminary agreements with customers or even with no idea of ?? How to increase the number of clients. Even for “Gazprom” fundamentally signing contracts with buyers before production and construction of gas pipelines. You can easily buy the equipment and later, and find markets – a much more difficult task. If the loan funds will not help you attract new customers, you can purchase the equipment only if it would reduce your expenses.

Loan term production cycle

To get the long-term success, the timing of the loan must be weighed at a rate of turnover. For example, if you take out a loan for a period of 3-4 months (as is customary for commercial operations), the borrower, wanting to ensure that the next production cycle, can bring a default. This is due to the fact that the actual credit period of many trades much longer period of one revolution. Repayment of the loan is possible only if the accumulated net income, equal in principal amount. Therefore, the feasibility studies of the projects should be much further ahead.

Loan in excess of the

If the enterprise already has a debt load of 2-4 times the annual income or exceeding annual revenue, a more cautious approach to lending further business, and start looking for other sources of funding. There are situations where you need to stop in time, despite the possible attractive prospects in the development of the case, which can be realized with the help of new money. It seems that the market is growing, and things should go well. But in this situation it is better to concentrate and do the reduction of costs. In a short period of time, you can dial a surprising amount of loans, they are not very difficult to obtain. But even easier to spend these loans. It is much more difficult – to get them to make a profit and pay off the banks.

Miser pays twice

For business is equally harmful, whether you spend a lot or skimp. This case concerns only the most useful, the most necessary for the enterprise. If what you are considering to purchase, will help several times to reduce your costs – do not be greedy. If you need valuable advice, through which you can avoid many of the mistakes and put the case out of the impasse, do not hesitate to seek such advice from qualified consultants.

Funding only via Credit

It should be understood that the loans – no more than an auxiliary method of financing. The company must initially have a substantial part of its own funds. A further activity of the enterprise should be financed mainly by its profits. Of course, what you earn, you should be enough “to life”, but buying expensive cars and other “toys” out of profits – a likely path to closing a business. Most large company business financing comes mostly from profits, dividends spent 10-20% of net income, or do not pay them at all. In some of these companies except for those who work in the international market on the basis of the western practice, pay big dividends – 40-50% of net profit. This MTS “CTC Media, TNK-BP and others.

Lack of free money

Proceeds from loans may be too risky if the company has no balances, or if you will spend the entire loan immediately, going for broke. There is a saying: “The bank will give you an umbrella when the sun is shining, and take it when it starts to rain.” Here, of course, exaggeration, but to some extent this is still true, because the complete lack of liquidity indicates a problem in the business of the client, not the bank’s excessive caution.

Fear of attracting investors

Do not immediately reject the possibility of selling the company shares to an outside investor. You can sell a third or a quarter of the investment fund or a wealthy man who is willing to invest in your business, and such opportunities are now enough. Such a contract can be concluded is not forever, but only for a certain period – three years, for example – when the investor invested in your company will earn money and significantly increase its value. Investors need to look very carefully and only work with the funds and the people who have repeatedly confirmed the good business reputation.
Improper ratio

Time is money

You can lose benefits if too hurry to close the loan ahead of schedule. Conversely, if you try to stretch the repayment of the debt for the entire term of the originally installed, it will distract you extra money to pay the interest and thus harm its business.

Case Studies

The company “Rusal” tried to develop rapidly in several directions, and in a crisis of its position strongly shaken due to the decrease in aluminum prices. By the end of 2009, their debt exceeded earnings of 22.9 times and this was the worst position of the company for the entire period of its activity. At the end of 2010 were able to normalize this figure up to 4.4:1.

For several years, pharmacy network “36.6” has a high debt load, though not permit delays for its obligations. The company has the means to conduct large-scale expansion. By the end of 2010 its rate was 4.8:1, and interest payments were only one and a half times lower EBITDA. In the stock market, bonds of the network is defined as a high-risk speculative instrument.

Restaurant chain “Rosinter” a lot invested in the development, and balancing on the verge of profitability, net profit margin, has successfully reduced its ratio of net debt to EBITDA ratio to 1.1:1 in 2010. In the last period he was 2,97:1.

In 2010, the non disk “Magnet” opened a lot of stores novih, but still maintained a low level of debt 1,39:1, and in 2009 was recorded minimum value of 0,09:1. His main challenger, X5 Retail Group (owner of the store, “Crossroads”, “Carousel”, “Roundabout”), is a more aggressive debt policy, and their ratio – 3.7:1 by the end of 2010. The comparable figure for the year 2009 amounted 2,08:1.

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