CMR SELF-FUNDING BUSINESS LOANS

A unique method of business finance, providing small and medium-sized companies with loans that make no demands on cashflow, while substantially increasing profits.

SUMMARY

The Scheme uses the purchase cost savings inherently available in almost all smaller companies to provide loan capital that costs the company nothing. Normally the company’s share of the savings will cover in full both the loan capital repayments and the lender’s interest charges. The Scheme is based on four principles:

*     A loan of up to 100% of the annual cost savings identified

*     Loan repayable over 30 months, which will also be the length of the Scheme

*     Savings achieved are split between the company and CMR

*     The company’s share is used to repay the loan capital and interest directly to the lender.  CMR’s share pays the Scheme costs

At the end of the Scheme, all the cost savings accrue to the company in perpetuity.

Eligibility

The Scheme is available to companies with purchase costs over £2 million p.a.. It is based on purchasing process expertise, rather than bulk-buying, so is seldom appropriate for retail businesses.  CMR will advise on company eligibility based on individual circumstances.

Although the loan is subject to normal security requirements, it is a unique feature of the Scheme that it can create its own collateral. Companies that have used their assets to guarantee earlier finance, or that are otherwise unable to provide full security, are still eligible. Businesses that are fundamentally insecure will not be considered, but lack of full collateral is not a bar to participation.

Cost savings

CMR can usually identify cost savings of between 10% and 15% across the purchased cost base for materials and overheads. Many companies are reluctant to believe that savings of this magnitude could be available, but they frequently are. This is no reflection on the competence or efficiency of the company. It stems from the fact that CMR and its associates have specialist knowledge in the field, access to a wider range of suppliers, greater experience in negotiating and purchasing, the advantage of being objective outsiders looking at a business afresh and the time to dedicate themselves to the company’s purchasing arrangements without outside distractions.

CMR is likely to recommend price renegotiations with existing suppliers, the adoption of some new suppliers and strategic and operational changes. The company’s quality standards will be an integral part of this process. At all stages, the company retains complete freedom to accept or reject any recommendation or, if an unsatisfactory change is made, to revert to a previous supplier.

Stages of the Scheme

Preliminary discussions will determine if the Scheme is suitable for the company and whether both parties wish to proceed. If so, they sign a simple agreement to commence the Scheme, which the company may terminate at any time prior to loan input. The Scheme has three stages:

Stage 1 – Purchase Audit: CMR’s team will audit the company’s purchasing of materials and overheads and recommend the necessary measures to improve efficiency. The company will choose which measures it wishes to adopt. If both parties agree, the Scheme will proceed to:

Stage 2 – Trial Period: This lasts for three months. The agreed measures are implemented, validated, benchmarked and documented. The new arrangements are reviewed with the company and revisions made if necessary.  If both parties agree, the Scheme proceeds to the contract period and a finance schedule is appended to the agreement, specifying the loan and payment arrangements.

Stage 3 – Contract Period: This lasts for 30 months. Throughout the period, the company pays one twelfth of the agreed annual savings into the Scheme each month. After the contract period ends, all savings revert to the company in perpetuity.

The loan

The loan is an ordinary commercial loan, subject to normal conditions and at the sort of interest rate you would expect for a regular bank loan. It can usually be arranged either through the company’s own bankers or factoring/discounting company, or through a lender introduced by CMR. The loan will be up to a maximum of 100% of the agreed annual savings and is to be repaid over 30 months. The company retains sole legal liability to the lender for the loan.

The loan will be advanced as soon as the lender’s security requirements have been met. If the company already has full security, this will be at the start of the contract period. If not, the company’s share of the monthly savings builds up in a reserve fund until it reaches the required security level, whereupon the loan is released. Companies in this position will have to wait several months, but they can qualify for a loan where a bank would otherwise deny the facility.

Financial management

Before the trial period starts, independent overseers are appointed to handle all monies in the Scheme. Usually they will be the company’s external accountants or solicitors. The overseers receive the company’s payment each month and disburse it. First, they take their own agreed fee. Then they divide the balance between the company and CMR. This division is normally 50:50, but with a provision in the agreement that, for a large Scheme, it may move in the company’s favour to a maximum of 60:40. The company’s share is used to make the interest and capital payments directly to the lender. Any surplus is returned to the customer.

If the Scheme itself is providing partial security for the loan, the overseers will ensure that sufficient reserves remain in the fund to cover the lender’s required security on the outstanding loan amount.

All funds in the Scheme are new to the company and arise solely from CMR’s input. If no savings are found, no one earns anything. CMR receives no fees from the company at any stage; its earnings come entirely from tangible savings that the company makes from adopting its proposals.

Safeguards

The greatest potential problem is if the annual savings fall much below their initial level. This could result from a sharp downturn in all or part of the company’s business, for example. The agreement provides for the company to request a fresh audit in such circumstances and, if appropriate, for the annual savings (and hence the company’s monthly payment) to be reduced.

Under the principles of the Scheme, this reduction would affect CMR’s and the company’s share equally. One possible consequence is that the company’s share might no longer cover both the capital and interest payments on the loan.  There is already a built-in reserve against this contingency, but to reduce the risk still further the company may decide to take a slightly smaller loan than the Scheme allows. If, for whatever reason, the Scheme cannot meet the full capital repayment in a particular month, the balance is paid directly by the company to the lender.

Finance and taxation

The Scheme increases company profits, usually by just under 50% of the annual cost savings during the contract period, and always by 100% of them thereafter. The interest element is both a charge and a revenue, so has no tax implications, but the balance (whether capital repayment or surplus) is profit and will be taxed accordingly. The Scheme is cash positive from the moment the loan input is made and is pre-tax cash neutral during the rest of the contract period, since payments made into the Scheme are not more than the cost savings received.

A typical example (for illustrative purposes only)

The company has a sales turnover of £5 million and a purchased cost base of £2.5 million. The purchase audit identifies potential annual cost savings of £300,000 (12%). Following a review with the company some sensitive supplies are excepted, leaving forecast annual savings of £250,000. At the end of the trial period these savings are confirmed and a loan of £250,000 is advanced to the company, requiring 30 monthly capital repayments of £8,333, plus interest on the declining balance at 8% p.a..

At the end of each month, the company pays one twelfth of the annual savings (£20,833) to the overseers who, after taking their own agreed fee, pass 50% to CMR and use the other 50% (£10,156) to pay the bank interest and capital repayments on the loan.

After some months, the company  believes its cost savings have reduced and requests an audit, which reveals that savings have indeed fallen by 15%. The company’s monthly payment reduces to £17,708 from month 13 and its net share of this amount is £8,633. Whilst the bank interest (then at £1,000) can be paid in full, the Scheme’s contribution to the capital repayments will fall short by £700 that month, which the company will need to pay directly to the lender. This deficit will later turn to a surplus as monthly interest charges decline.

Over the full 30 months (and having absorbed a 15% reduction in savings), the Scheme will have repaid all the interest on the loan and (once the monthly deficits and surpluses have been aggregated) all the capital repayments as well, leaving a net surplus to the company of £1,432.

The legal agreement

The agreement gives effect to the Scheme described in this brochure. The company is committed to pay one twelfth of the prevailing annual savings for 30 consecutive months. The agreement describes how cost savings are to be calculated; it creates the mechanism by which annual savings can be revised as the Scheme progresses; it confirms the company’s control over all purchasing decisions and it gives the company the right to terminate at any time prior to loan input.  The agreement protects both the company and CMR.  In the event of early termination, the company must pay CMR half the savings it makes as a result of CMR’s proposals for a further 30 months.

Additional funding

CMR has made special arrangements that can help a company raise additional finance through combining a Self-Funding Business Loan with bank or debtor secured finance. Companies that already have outstanding loans should note that they can replace all or part of the existing loan with a Self-Funding Business Loan, with immediate, substantial and permanent benefits to both cashflow and profits.  CMR is also one of the largest providers of private equity capital for SMEs.

For more information, or to request that a CMR executive makes contact with you, please call CMR’s head office on 020 7636 1744 or e-mail cmfc@cmruk.com.

This is an overview of the scheme. It is not a representation that you are eligible to participate and does not form part of a legal contract. The scheme is provided by Cavendish Management Finance Corporation Ltd, a subsidiary of CMR.