Almost all businesses need to make use of debt finance, whether in the form of loans, overdrafts or, for larger corporates, bonds. After a prolonged period of exceptionally low interest rates, this year has brought substantially higher interest rates and a wave of other economic headwinds. This has created a more challenging environment for businesses needing to refinance their existing debt or to access new financing lines. Here are five practical steps you can take – both short and longer term – to ensure your business is best placed to access the debt finance it needs.

1. Plan early

While most funders would insist they remain "open for business", loan funding credit applications are inevitably under increased scrutiny, often resulting in a more drawn-out lender approval process. In addition, the capital markets have seen unusually high levels of "no-print" days recently, where there is a lack of new primary issuance due to adverse bond market conditions. Anticipate this by engaging early with existing funders and bond investors, and potentially other back-up sources of funding. This is particularly true for businesses needing to refinance existing debt in the next year. Your options are likely to be narrower, and your bargaining power lower, if you leave those discussions until the last minute. In the capital markets, bond investors are being asked to consider more deals than usual in those periods when the markets are more favourable, and last minute deals simply may not attract the attention of bond investors.

2. Timing – consider all the variables

For businesses that do not have to access finance immediately, one of the most difficult questions is when to next tap the debt markets. No one can be sure whether interest rates will continue to rise, or whether they have already peaked, and a finance director's view on this is likely to be the main factor that determines their business's approach to timing. However, businesses should also be aware that debt options can disappear or reappear quickly. Banks that have been lukewarm about funding during the second half of 2022 may have a greater appetite to deploy their balance sheets in the New Year. On the bond side, the preparation and marketing time required to execute a new debt capital markets issuance can be significant. Issuers can put themselves in a better position to move quickly when market conditions appear most favourable by establishing or updating a debt issuance programme and maintaining dialogue with potential bond investors through non-deal roadshows.

3. Be flexible on size and tenor

Even in favourable market conditions, larger and longer-term financings can be more expensive and harder to access. It may therefore be worth considering:

• shorter-term extensions to existing debt financings;
• in the bond markets, using tap issuance (a new issue being made on the same terms as a prior issue with a view to creating one larger "fungible" issuance) and, in the loan markets, uncommitted accordions to help potential funders digest your business's debt requirements incrementally.

4. Be prepared to look beyond the debt products you have used before

Since the global financial crisis, there has been a fundamental overhaul of the regulatory capital rules with which banks and other financial institutions must comply. Significant further changes are scheduled to be introduced in the next two to three years, as "Basel 3.1" is implemented in the UK and EU. Changes to these rules can have a significant impact on the capital cost of different debt products which usually flows through into the pricing of those products. For example, general corporate loans to unrated large corporates may become more capital-intensive and therefore more expensive, encouraging banks to offer more structured financing options (such as receivables financing) instead of, or alongside, more traditional working capital loans. This does not, of course, mean that you should accept what you are offered. However, you may need to be open-minded about debt products that you have not used before to ensure your business can borrow on a scale and at a price that works.

5. Ensure ESG is built into your strategy

All banks, and most other lenders, as well as bond investors, are now focusing on the environmental and social sustainability of the businesses that they finance. Part of that focus flows from the bodies that regulate financial services, which are increasingly mandated to use their powers to reorient capital flows towards sustainable investment, but it is also driven by purely commercial factors such as credit and reputational risk. Banks and bond investors are not necessarily turning off the funding taps for businesses that are not already operating in an entirely environmentally and socially sustainable way. However, it will become increasingly hard for businesses to access capital unless they are measuring their environmental and social impacts, and have developed plans to transition their businesses on to a more sustainable footing. Taking those steps is likely to remove one possible barrier to accessing finance and allow you to prepare necessary ESG financing frameworks. It may also encourage funders to offer or subscribe for ESG-linked debt products, such as sustainability-linked loans and bonds.

This article is part of a series on business resilience. See also:

Five things you can do to prepare for future shocks in your supply chain - November 9,2022