The education sector is currently experiencing a significant amount of change. With government spending cuts and increasing pressure in the form of competition from the private sector, education institutions are facing increasing and sustained challenges to secure new sources of revenue in order to ensure future survival. One such source of revenue is through bank lending.
In the current economic climate, education institutions seeking financial assistance from banks should first choose to enlist the help of a financial advisor who possesses specialist knowledge of the education sector. Such a specialist will understand the operation of education institutions at all levels, the market in which they operate, and most pertinently, knowledge of which banks are currently willing to lend within the sector and their lending criteria. Targeting a bank that is familiar with the education sector and which has demonstrated a recent track record of lending to institutions within it is a good starting point for securing a desired loan agreement.
Institutions with an existing relationship with a bank may enjoy an easier entry if asking for financial assistance from a bank; but, whether dealing with an incumbent bank or a new one, the same principle applies: prospective borrowers must be able to convince the bank that they represent a low-risk and reasonable investment.
Banks will be more inclined to lend to an institution that intends to use the requested funds for a particular project, as opposed to one seeking to raise capital for general or unspecified purposes. As such, it is necessary to articulate precisely what the money is intended for.
Next, it is necessary to present an accurately costed project. This requires meticulous planning, taking into consideration all factors relating to the execution of the project, from initial conception to final completion. Prospective borrowers should be prepared to show a detailed budget covering the lifespan of the project, with a breakdown of where and when funds will be used. Any variables that will impact upon cost and time ought to be factored in; along with any foreseeable loses of other revenue streams as a result of carrying out the project, such as a decline in both international and domestic student intake (and consequently, income from tuition fees).
As for any project, over-expenditure is inevitable, so allowing for adequate contingencies of approximately 20% over-run on initial budget, is necessary.
A prospective borrower should also be prepared to stress test their budget because this is exactly what the banks will do, for example, by looking to see how the budget will stand up assuming an interest rate of 7% per annum all in. If an application for funds shows that this stress testing has been carried out, this will impress a prospective lender.
Ultimately, banks appreciate that costing any project is difficult even with the most strenuous financial planning, but what they expect is a budget that is reasonable. Patently unachievable budgets will not inspire confidence and will consequently hinder a prospective borrower’s chances of securing funding.
It is necessary for the education institution to adequately demonstrate that they can service the loan. Education institutions can expect to have their credit history, capital reserves, value of assets and liabilities heavily scrutinised. In addition, banks will look closely at the health of the institution’s cash flow to decide whether the project and institution as a whole is financially sustainable, and whether its projected earnings do indeed demonstrate long-term profitability. If the bank is not convinced the loan and relevant interest can be repaid, the loan application will fail. It follows, that an education institution may ameliorate the likelihood of receiving a loan if it is able to demonstrate the continued receipt of other sources of income. Not least, this includes government funding, as allocated through regulators such as the Higher Education Funding Council for England (HEFCE) in the case of universities, and the Skills Funding Agency in the case of Further Education institutions. Demonstrating a good relationship with a regulator, and the continued availability of funding through them, will lend credence to a prospective borrower’s assurances that they will be able to service any loan.
Not every institution will necessarily have a perfect, unblemished, financial history. If this is the case, attempts should not be made to hide this (it may in any event be due to factors outside the institutions control) but rather, to show a good relationship with the regulator and a recovery plan which has been agreed with and approved by the regulator. This will illustrate to a potential lender that the institution is taking all the right steps.
Notwithstanding the turbulent economic climate, education institutions can still succeed in securing a bank loan, provided they exercise methodical and diligent preparation and presentation of a low-risk and reasonable investment plan.