A recently established hospitality business was looking to move away from expensive short-term finance and free up funding to support its next stage of growth.
The owners had plans to bring on additional staff and invest in stock, but with less than a year of trading behind them, finding the right finance wasn’t straightforward. They also wanted to avoid putting their personal property at risk.
Rather than simply replacing one loan with another, they were looking for a funding arrangement that could continue to support the business as it grew.
The business had made a promising start, generating revenue and operating profitably during its first ten months of trading.
But it was also carrying an expensive short-term lending facility. The owners wanted to replace that borrowing and put themselves in a better position to invest in the business, particularly through additional staff and stock.
Their limited trading history presented a challenge. Many lenders prefer to see a longer track record before providing business finance, and the owners weren’t looking to secure the loan against their personal property.
They also wanted the flexibility to access funding as the business developed, rather than having to arrange a new loan every time another working capital need arose.
The business hadn’t been operating long enough to meet Line Capital’s usual trading-history requirements, but its early financial results provided a useful picture of how it was performing.
The first financial statements showed the business was generating a profit, while bank transaction data supported the reported turnover.
After assessing earnings and the proposed repayments, Line Capital determined that the business met its minimum servicing requirements, although the margin was relatively tight.
The application required exceptions to the usual trading-history requirements, but the assessment supported a $40,000 Shadow Limit.
This structure addressed both the immediate need to refinance the existing high-cost debt and the owners’ plans for growth.
Unlike a conventional term loan, the Shadow Limit allows amounts repaid to become available for borrowing again. That meant the business could draw on the facility for future working capital requirements, within its approved limit, without having to apply for a new loan each time.
Security was taken over the business rather than the owners’ personal property. The existing lender’s security was also required to be released within five business days of settlement.
The business’s first financial statements covered ten months of trading, showing revenue of approximately $285,000 and gross profit of $120,000, with a gross profit margin of 43%.
Reported EBITDA was approximately $40,000, representing a margin of around 15%.
Bank transaction data supported the trading figures, with revenue assessed at approximately $350,000 on a last-12-months basis and serviceability EBITDA of approximately $50,000.
With existing and proposed annual debt commitments of approximately $45,000, the projected DSCR was 1.1x against Line Capital’s 1.00x policy threshold.
While servicing headroom was relatively limited, the financial assessment supported approval with policy overrides relating to the business’s short trading history.
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