Now, more so than ever before, access to finance will require a strong business case and good relationship with your banker and/or bank. This article examines why this is the case and what to do to access finance.
Current Economic Climate
While this is a brief overview only, it is clear that:
- China has had rapid growth but remains a smaller economy than the US
- Although the Greek economic issue is a major factor influencing the EU market and international sentiment, again, Greece is not a significant economy in the EU. The major EU economies are Germany and the UK.
There is no doubt that China is a major driver of growth and our trade balance in Australia. Its growth rate is also materially better than that of the US.
Similarly, while Greece is a major influence on market sentiment as the EU seeks to address its likely impact on confidence and the EU banking system, it should be noted that Greece is a very small economy relative to the other EU economies.
Australian Pharmacy Economic Conditions
The general Australian economic conditions no doubt drive the economic environment for pharmacy. The key factors that drive the pharmacy economic context, and ultimately bankers' view of the sector, include:
- Increasing health expenditure per capita
- Reasonable retail growth
- Continued growth in health employment
Health and Pharmacy, will remain a major component of the Australian economy as well as a key platform in our political platform.
It is important to understand these issues both:
- in terms of the economic impact of the global and Australian economy on your pharmacy; and
- the issues you will need to address with your bank and bankers.
Finance Market Overview
The reserve bank cash rate has declined significantly over recent years. However, banks have increased their margins.
Small business lending, including pharmacy, remains generally more expensive than housing lending.
Wholesale funding costs and general economic conditions make this a difficult time for finance. Access to capital is difficult and will remain so for the foreseeable future.
Pharmacy Banking
Pharmacy banking has progressed, however many banks are approaching the market with caution. There is an obvious flight of limited capital towards the better and less risky deals.
Loan to Value Ratios (LVR) have recently declined with most banks lending between 70% and 80% of the valuation amount. In exceptional circumstances, temporary arrangements may be provided to enable a 'good risk' to borrow more than 80%. Some banks have reduced their LVR's to below 70%.
Accessing finance in today's financial and economic climate
The Banks are looking for a strong business case which includes:
- positive cash flow (current and historical)
- significant equity
- collateral
- strong credit score
You will need to provide a detailed submission which addresses the above four issues. This is not a home loan and the bank will be looking for evidence to support lending to you as compared to alternative borrowers.
The submission should be truthful (any 'white lies' will simply build a wrong foundation for your relationship with the bank and banker) and cover a range of issues about the purpose of the loan, you and your business including:
- Personal & Business Background
- Purpose & Reasons for the loan
- Business performance & History
- Outlook & budgets
- Credit assessment & risks
- Structure (on or off Balance Sheet)
In examining your proposal, the bank will look for:
- Cash flow & Serviceability
- Security
- Character, Experience, Team
- Other factors
These other factors will include:
- Evidence that you are ready and capable to own and manage a pharmacy.
- Are you buying a job or a lifestyle? Where do you want to live and work?
- Demonstrated research, due diligence and network to support the business.
- That you understand your investment and know what return to expect.
- Your objectives and timeframe.
- How does or will the business meet your needs and aspirations?
Managing the relationship with your bank and banker is now more critical than ever
Your relationship with your bank and banker is now more critical than ever. This means:
- Timely reporting – get your financial accounts to them on time;
- Understand the key measures they are assessing your business on; and
- Alert them early and have a plan to address any issues that may arise.
Alternate finance sources
Other sources for pharmacy finance include:
- Asset based loans & equipment finance
- Property Finance
- Wholesaler based lending
- Vendor Finance
Call Christian Sirianni for a guide to pharmacy banking OR to discuss your finance needs. We're happy to assist you to manage the relationship with your bank.
To discuss how Medici Capital can assist you please call us on (03) 9853 7933.
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