Where to find funding when the banks won’t lend


Does your business need money? Where do you go if the bank says no?
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When the banks won’t lend to you, or what they are asking for as security is more than you want to offer, where can an emerging or middle-market company turn to?

“Australia is in a position where 90% of business lending is sourced from the regulated deposit-taking banks,” says Joe Millward, a founding partner of Epsilon Direct Lending. “If you look back to the US and the European markets, that was the case 10 or 20 years ago. Change takes time. We think there’s a natural evolution that will occur where private credit funders, like Epsilon, will grow to provide a lot more of the market share than the current 10% that we occupy.”

Epsilon Direct Lending is an Australian-based private credit asset manager. It provides flexible, tailored funding to Australia’s growing middle market businesses. In his 23-year career, Millward has worked for financial services companies in Europe and in Australia.

He tells Forbes Australia that in Europe it’s around a 50:50 split of market share, while in the US about 90% of lending is done by the funds and only 10% by the banks. In Australia, Millward thinks in the next decade it could move closer to a 50:50 split here in the $3 trillion lending market, where around $2 trillion of that is to consumers for things including residential mortgages, credit cards and car loans.

“We look at the size of your company. If you’re a BHP and borrowing, you’re in the capital markets. You’ve got layers of debt that you can borrow in all different shapes and sizes through to a sole trader who might be lucky to get a small business loan where he’s providing a director’s guarantee and doesn’t have much security, maybe his personal home to pledge. There’s a real spread by size.”

Epsilon also considers the type of company. A real estate developer could be borrowing to create a building, a research company might borrow to fund research and development or a manufacturing company could be wanting to borrow to buy plant and equipment. The purpose of the loan is a consideration, too. Funding for working cash flow, or for an acquisition are examples.

Why would a company choose to deal with a private credit provider rather than a bank?

Banks like tangible assets and standardised lending products, much of which is unlikely to suit corporates in the middle market. That’s where customised financial products are essential to manage the risk.

“We’re very strong in intangible assets and by intangible assets, we’re talking about trademarks, inventions, customer data, you think of Facebook. If you look at the Dow Jones Industrial Average’s largest companies in the US, between 80% and 90% of the total asset value of those listed stocks are intangible assets, not fixed assets.

“So intangible assets aren’t wishy-washy things, but the regulators don’t like lending against companies that have strong intangible asset bases, they’d like to lend against brick and mortar. We can provide a more customised non standardised financial product to borrowers. We can importantly do it in a timely and efficient manner. Because within private credit funds, the owners of the company are typically the decision makers. I’m the decision maker at Epsilon alongside my two colleagues who founded Epsilon.”

What’s the risk?

More flexibility doesn’t necessarily mean more risk, Millward says. Products tailored to each company give business owners greater choice.

When a business is borrowing money, it introduces risk. If you haven’t got appetite for that, just don’t borrow, Millward says, just wait it out and grow organically. But if you’re happy to take on risk by pledging security, then there’s a few important considerations in terms of determining where to source funding.

“We’re in an inflationary environment and it can be the case that as interest rates go up, it tends to mean that valuations go down. From a timing perspective, it depends on your needs, and it depends on your personal situation, but it’s certainly not as good a time to raise equity as it was a year ago.”

Businesses considering borrowing need to have their “eyes wide open” to the headwinds that their business might face and the downsides that might occur in the current environment.

“Normally, in this kind of environment, banks are a lot more cautious; credit settings tighten. Typically, you will probably see over the next year or two, the velocity of lending that the banks announce starts to slow or contract or certainly gravitate towards more secured lending than ever. You might see them grow their books, but it will be probably towards the real estate borrowers, less so the goods and services companies that are the building blocks of the foundation of our economy. And that’s where private credit can really step up because it’s an all-weather strategy for us. Between the three founders, we’ve lived through all market conditions successfully. We’ve never provided a loan to a company where that company has gotten into an insolvency.”

Joe Millward, a founding partner of Epsilon Direct Lending. | Image source: Supplied

Millward’s six tips to secure funding:


The number one piece of advice I give to business owners, CEOs, CFOs, looking to raise capital is be transparent around what the risks in your company are, what are the headwinds it might be facing. If you try to say it’s always going to be tremendous, that it doesn’t have any risks, firstly, it’s not believable, so there are immediate question marks.

Secondly, you’re probably setting yourself up for failure because if you’re not prepared to weather the storm and understand what might happen to the business in those conditions, you might be biting off too much. Hopefully the lender won’t accept that position and will put you through a strong diligence exercise, but in some instances, that might not be the case and you might find yourself with a loan that you can’t afford to repay and that’s never a good thing. So always be transparent and open with the risks and any challenges you think your business might face for the duration of the loan that you’re looking to take out.

Make sure everything is in order

It’s hard to lend to a company where you know they don’t present a clean set of books and records. Typically, lenders will need a P&L or balance sheet and cash flow going back at least a couple of years, clearly presented, well understood, and well-articulated by the borrower. Make sure your financial statements are in order.

Ideally, you’ve got audited accounts and show that you can talk about your business in a very simple way. No business should be so complex that a lender can’t grasp within five to 10 minutes exactly how it is that you make $1 of free cash flow. If you can’t succinctly explain how you generate $1 of free cash flow in five to 10 minutes you need to rehearse your pitch and rework it to keep things simple.

Be clear about why you’re borrowing

Sometimes it’s just a refinance of an existing loan. That’s fine, but why did you originally borrow? What was your ultimate purpose, because there should always be a purpose. It might be an acquisition. It might be a buyout of other shareholders. It might be to put up a building or maybe to buy a fleet of cars for your staff. Understand the purpose of the loan.

Think about what makes your business a ‘quality’ borrower

Ask yourself, ‘What are the real components in my business?’ What makes that business a ‘quality borrower’? For somebody with fixed assets, it’s going to be all about the quality of those fixed assets. For an operating company, and that’s where Epsilon focuses, we’re all about the quality of the cash flows that a company generates.

How sustainable and predictable your cash flow is will be the Number One question a lender will ask. The things that make cash flow sustainable and predictable are things like customer contracts, diversification of customers, diversification of products that you sell. If you’ve got a single product that you’re selling to market, that presents concentration risk, and that means that your cash flow might not be as sustainable and predictable as a company that has 1000 customers with a whole bunch of products.

Think about what it is that underwrites your cash flow that makes it high quality and predictable, because if you can articulate that, you’ll be in a great position to secure a loan, with a low cost of finance.

What’s the quality of your security

Ask yourself how well set up your company is to provide security, because if you’ve got quite a complex legal structure and your company has a whole bunch of family trusts, shares and no kind of holding companies in the business, then providing security could be complex. Creating a structure that allows you to borrow can be very costly and time consuming.

Make sure that you take legal advice early on about setting up your company structure so it can be future-proof. Because we see it all the time in the M&A market where companies are trying to sell their business or raise additional capital and they come big headwinds around the legal structure and the complexities that can bring. Your capacity to borrow and expand might be limited because of the choices you make.

Build relationships

I think there’s correlation between success and those that genuinely invest a lot of time understanding the lending market. Set yourself a target to have 50 coffees and speak to all the lenders, just meet them. Meet a whole bunch of advisors in the market that can be anyone from accountants to lawyers to tax guys, you know, no obligation, you’re not paying money at this stage. Just explore what it is about your business that you might be missing. Talk to the advisory community, build relationships early in that community.

At Epsilon, we might end up lending to a company who we first met three, four or five years ago. We built a relationship through time, we told them they might not be ready. Then they come back in three or four years’ time and it’s at that point where they’re ready and we’ve seen their journey we understand their business and now we’re in a great position to support them versus the cold call.

Really nurture those relationships and set yourself those kinds of audacious goals of heavily networking into an area of the market you’ve probably never been exposed to, which is financial services. Often a business owner is a subject matter expert in their field. There’s sometimes a natural reluctance to talk to the people in the financial services industry, although those people are the experts in their field and in what they do. We definitely see correlation between success and those that are willing to invest in that journey.

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