Published in the January 2008 Australia’s Mining Monthly

There is a credit crunch on. Lending is getting tight. That is what has been shouted from the headlines of the mainstream press for the past month or so.

Interestingly, while those papers have been painting a bleak picture for the mining supply sector, the reality is quite different. Funding is available and mining industry suppliers seem well placed to get it.

There will be more of an emphasis on proving a business case than there has been in recent times. That is really a return to the way things were.

Being able to show the company has good, experienced leadership and a plan to get through the tough times also will be a benefit. For some businesses this could be tough. A raft of new companies formed to ride the mining industry wave and have never experienced really hard times.

Commonwealth executive general manager of local business banking Symon Brewis-Weston said there was capital available for small to medium-sized businesses.

“Credit is tight if you look at the top end of town,” he said. “But certainly not on our lending base [small business]. Our lending volumes and application amounts haven’t fallen at all.

“There are funds available for mining contractors and manufacturers.”

Indeed, the Commonwealth wants to grow its volume of lending to that sector and other small business areas. “I haven’t seen any sign that the other majors are starting to pull back either,” Brewis-Weston said.

“Banks would rather lend to small business than write a big cheque to a big company.”

Brewis-Weston said the Commonwealth was keen to grow its equipment finance business.

“Of course very specialised equipment may require the business to put up more equity because of the difficulty we would have in selling it,” he said.

Small Business Development Corporation managing director Stephen Moir said banks were seeking greater collateral.

“Banks have always demanded high collateral from small business but now it’s up to 95 or 100 per cent,” Moir said.

“When evaluating a loan application banks will also be looking for a good track record of repayments on past loans, regular banking habits, good profitability in the business and up-to-date accounts.

“Good projects will get financed, so presenting well-planned business concepts, clearly costed, with realistic financial projections on how the borrower intends to repay the loan, will show the application in the best light and will likely get a favourable response.

“The best thing to do is to get the right advice before you show up to the bank.”

GE Commercial Finance managing director of equipment finance Kerri Thompson said money was there for those who could make a sound case.

“We’d be looking to help those companies that are looking to invest in their productivity,” she said. “It makes them more viable in the long term.

“The volume is going to come back. When it does you want to be in a position to take advantage of it.”

However, there are still tight times to navigate.

The speed of the downturn has many businesses reeling. Those companies with sound plans in place will find it much easier to get finance.

“If revenues are dropping, how is the company dealing with that?” Thompson asked.

“If the company can show a great leadership team that can react to the changing environment then that will help.

“We’re looking for teams that are capable of operating in a changing market.”

These people may not have gotten it right the first time they encountered tough times, but it is good if they can show that they learnt from their mistakes.

They also need to show that they have looked at different ways the market may react.

“Scenario A might be what you forecast your market will do,” Thompson said. “But tell me what Scenario B might look like. What might your reaction to that be? Then Scenario C, where revenue really drops off significantly. What would you do then?

“It’s having that plan.”

Having good systems in place also is important.

Keeping a weather eye on the market is essential.

What is the market doing? How will it impact on the business?

“Having people who can do that sort of analysis helps,” Thompson said.

“Your most important system is your cash flow management system.”

Brewis-Weston agreed. “The primary thing is the serviceability of the cash flow to be able to pay for the equipment,” he said. “Understanding the sources of your cash flow is important. It’s always preferable to have more than one debtor.”

GE executive director of mining financial services Richard Byrne said he had noticed that most of GE’s mining industry clients had pretty good systems in place.

“I think a lot of our customers have been through these times before and know they have to be competitive,” he said.

That cyclical nature of the mining industry has helped make the sector better prepared to handle sharp downturns.

“You usually get great stories from the mining industry because those guys have been through these sort of downturns before,” Thompson said.

“In some cases they are really honest with you. We’re looking for that honesty and the reality of what they can do and what the constraints will be on them. Having that detail around the plan is really important.”

Constraints, for example, could be the cost of laying off staff. The plan may call for a percentage of staff to be removed if turnover falls, but how much will that cost the business in terms of redundancies?

Another side of that honesty is being upfront with a lender whenever there is a problem. This can prevent problems later on.

“If there is a problem they have to be able to talk to us,” Byrne said. “That can help us restructure their repayments around foreseeable incidents.”

Thompson said GE had restructured company repayments in the past – the most recent examples being during the floods in Queensland in early 2008.

“We structured payment holidays in some cases,” she said.

Another option for mining suppliers is to make use of the equipment they already own to raise further funds.

Thompson said they could opt to sell that gear and lease it back.

“That’s for those not making expansion moves but just freeing up some capital,” she said.