Banks have tightened the credit purse strings in recent months, setting the yardstick higher and higher as a direct reaction to the downturn in the global economy. Their aim: to make sure nobody has to default on their loan. According to a survey conducted by the German Bundesbank of a representative sample of financial institutions, the standards applied to corporate finance agreements in the last quarter were even stricter than normal. Even if companies are given credit, they have to provide more guarantees than they used to. Most banks have exploited sinking interest rates to improve their margins. Only a fraction of the three per cent drop in European Central Bank (ECB) interest rates announced last October has been handed on to banking customers. Despite the restrictive approach taken by the banks, the Frankfurt- based Steinbeis Consulting Center Medium-Sized Businesses Financing and Investments has developed financial concepts for a number of medium-sized companies – and successfully translated them into practice.
The right preparation and innovative ideas can help companies attract the financial backing they need. One company in the automotive sector, set up only three years ago, grew so rapidly that its turnover is already in the tens of millions of euros. To maintain its course of expansion, it needed a new injection of funding, so in December of last year, the company approached its bank – only to be left hanging until mid-February. By this time, the owner had decided to call in the specialists from the Frankfurt Steinbeis Consulting Center Medium-Sized Businesses Financing and Investments.
Less than two weeks after the initial meeting, the company’s owner received a financial rating detailing the current status of his company. Next came an evaluation of the firm’s financial gearing and its actual finance requirements.In the third and final step, the Steinbeis experts issued an executive summary complete with a funding concept for new investment.
The proposed funding concept involved partial collateral from public funds and the use of a dormant holding equivalent to 25 per cent. This approach made it possible to raise the proportion of proprietor’s capital to more than 30 per cent on the December 2008 balance sheet, giving the company a much more stable financial footing. With the dormant holding option, the financing costs for the 25 per cent share of capital may have been higher, but this was compensated for by lower finance charges for borrowed capital. The good rating and investment gearing made it possible for the company to achieve an average interest rate for borrowed capital of less than four per cent.
Previously, the company was wholly dependent on a single bank. The Steinbeis experts therefore considered it important to select another source of finance and start using it. To do this, they whittled their selection down to four banks, which were then invited for interviews. The banks were shown the full background of the company and introduced to the planned financial concept. They were also given an opportunity to outline their strengths in providing finance to mediumsized companies. Just six weeks later, the company was making its first credit decisions – and after weighing up the options, it selected the bank that best matched its long-term needs. One central aspect of the company’s decision was whether the bank also had subsidiaries outside Germany, which would allow the firm to build up an international cash management system in the years to come. Looking back on the project, it is clear that by providing a detailed funding proposal, the advisors from the Steinbeis Consulting Center Medium-Sized Businesses Financing and Investments made it possible for the company to considerably broaden its financial base and reduce its dependence on a single source of funds, simply by using two banks. The company’s gearing remained stable and a further two million euros of funding were obtained. The terms of funding improved by more than two per cent compared to the terms previously offered by the company’s original bank.
None of this would have been possible without knowing which “financial melodies to play”, combined with careful preparation before meeting with banks and credit institutes. Funding from banks is extremely tight at the moment and the situation is not likely to improve in the months to come – which is why it is now more important than ever to prepare discussions with banks professionally and carefully. As specialists in financial issues, the Frankfurt-based Steinbeis consultants understand the ins and outs of banks and the demands they make, and know exactly how to prepare for interviews and evaluations. This means they can negotiate with banks on a level playing field when acting on behalf of their clients.