5 SHOULD-HAVES TO QUALIFY FOR FIRSTLINE FUNDING

If one were to read all the blogs on this website, one could think that Firstline Securities Limited is a company that mainly offers financial advice and investment services to individuals and institutional clients. This is partly true, but the reality is that we do so much more. In reality, a large part of the company’s efforts is dedicated toward helping businesses realise their full potential by lending them the money they need to expand into a new territory, launch a new product, open a new store or anything else that may require a large investment of resources a business may not have.

However, we are not a bank with a lending license and our funds come from investors. As such, Firstline’s shareholder funds are merely a part of the debt capital (and equity in a very few instances) extended to customers. Instead, we structure, i.e. we create a financial instrument on behalf of the company in need of funding and then market this instrument to clients looking to invest their own funds for superior risk and returns.

The client in need of funding and the client looking to invest thus enter into a relationship as borrower and investor, and the borrower pays back the investor according to the terms and conditions set out in the loan note agreement.

But before we reach this far, a lot of work has to take place, and this is why I decided to write this blog which sets out to shine some light on our internal process. In this particular entry, I will focus solely on how Firstline decides which prospective clients with funding needs meet our criteria.

So, what do we look for when a business approaches us? Well let’s have a look:

Let us go through each in a bit more detail.

Let’s say you want to buy a house and you approach your bank for a mortgage, what will they ask you to provide 100% of the time? A down payment of 10-20%, usually, of the total sale value of the house. Well, if you own a business and would like to build a new plant for example, and you assess that it will cost you TT$10 million in total, then we would expect you to contribute at least 25% of that cost, or the equivalent of TT$2.5 million.

This is not necessarily money that you have to spend. Let’s say in the previous example that you own the land on which you want to build this plant and this land is valued at TT$2.5 million, then there you go, that is your equity contribution right there.

The reason equity is so important to us is that it shows how serious you are in your endeavour hence the reason why I tend to call this one “skin in the game”.

That’s a big word: collateralisation – but really in the same manner that a bank will ask you for a down payment on a mortgage, it will also ask you to put the property you are looking to buy as a collateral. The difference between Firstline and a bank is that we are more than willing to consider other forms of collateral.

In essence, when looking at lending money, we want to make sure that, if things were to go terribly such that the client cannot repay the debt they have taken, and that ALL other options such as restructuring of said debt, have been exhausted, we can, to the benefit of the investors, try to recover as much of the money they are owed as possible.

So, following on that same example, if you are looking to borrow TT$7.5 million (the TT$10 million the plant will cost you minus the TT$2.5 million you are contributing as equity) then Firstline would want you to provide at least TT$11.25 million in collateral security (or 1.5 times the amount you are looking to borrow, we call that number the Collateral Coverage Ratio).

Collateral can take many forms, be it land, buildings, equipment, personal guarantee from the owners of the business or even from third parties unaffiliated with the business, assignment of payments from contracts, insurance coverage, etc.

However, at the end of the day, even if it is never a pleasant thing to consider as it is used in the last resort, collateral is indispensable to mitigate the risk of lending money.

If you ask a bank for a mortgage as a couple, you will get better terms (usually) if both individuals have strong and secured jobs. If only one of you has a job, or both are employed but on a contractual basis, the risk is greater for the bank. The reason it is greater is that established and consistent cash flows from two long-term jobs are better than one. If someone loses their job, the amount of money made by the other may still be enough to continue to service the monthly payment toward the mortgage.

Well, we look at it the same way. It is better for your business to sell multiple products to multiple clients across multiple industries than making all your money from one big client buying one product. What would happen if that one client suddenly decided to buy from your competitor? Your business would surely suffer and your ability to pay your debts may do so as well.

It goes without saying that if your business is not profitable, it may not be able to service any additional debt and instead you may want to look at adding other equity investors instead of loans for your funding needs. But even having said that, it is extremely important for us and our potential investors in your debt instruments, that your business has a strong financial foundation to stand upon.

As such, we feel comfortable when a company can provide financial information that supports a Debt Service Coverage Ratio (DSCR) of at least 1.5 times. The DSCR is a mouthful but in effect it is the Net Operating Income of the business divided by the expected Interest Expenses. I won’t go into additional detail as I am trying to keep this simple but a DSCR of 1.5 times means that even after paying what is due to service the debt your company should still be left with enough money to thrive.

Alright, we have almost reached the end and as a bonus this one is a bit outside of your control, dear prospective client. Marketability to investors is defined as how appealing to potential investors your debt as structured by Firstline would be.

The answer to that is a mix of many different aspects such as the repayment period/tenor of the debt, the interest rate, the overall structure and frequency/periodicity of payments, the currency it is issued in and repaid in (they can at times be different) but can also include factors such as the sector of the economy from which the business originates. For example, there have been periods when debt originating from the oil industry was high in demand as that sector was thriving and as a result, investors were looking for any way to get exposure to that particular sector but today, not so much.

At the end of the day however, it is very rare that a client who qualifies from points #1-4 would not to be able to issue debt that can be described as marketable. And if that happens, Firstline will work hard to make it so by tweaking the terms of the instrument to make it more appealing.

Conclusion

Now is probably the time to say that whilst those five points are very important to Firstline when considering new clients, we pride ourselves in our high level of flexibility. In reality, a prospective client who qualifies for all of the above is rare and more often than not, clients will score well on three or four points, but may “fail” on one and it is our job to make sure we structure the debt to make it financeable.

I hope this article was enlightening to you!

Going forward I will talk about the next steps in this process, as well as everyone’s favourite subject: onboarding and compliance (really fun!!!) and why they are so important!