Why would a bank fund an EOT?
When an employee ownership trust owns a business, securing bank funding can be more difficult. This is because a bank may have less protection than a company owned by individual shareholders. In a company owned by its employees, no one wants to personally guarantee a bank loan. This is because there is no motivation for individuals to take on that risk.
Some banks still fund employee-owned businesses. These businesses usually have one or more of the following characteristics:
- Assets over which the bank can take security, such as land, plant and machinery or stock;
- A cash-generative business, demonstrably capable of servicing the debt;
- A business with strong internal controls can provide high-quality management and financial information. It can also anticipate future challenges for the business.
- A balanced management team, with little or no dependency on the founders of the business;
- A better business than their competitors in their sector;
- A share option to attract and retain talent at a senior level.
These factors combine to increase the bank’s likelihood of repayment.
Banks may also be less willing to lend immediately after the transition to employee ownership. The transition can be a huge change for the business particularly if the founder is stepping back from running the business. Banks may require a few years of successful trading under employee ownership before giving significant loans.
Companies should be careful when thinking about using bank funding to pay for the transition to employee ownership. If the business needs funding for new equipment or expansion, the loan could use up valuable resources. The founder may be happy about the large payout they received, but the debt burden could affect future payments.
Despite this, it is now easier than ever for employee-owned businesses to get bank funding compared to the past. Banks recognize the benefits of engaging employees in the business.
The challenger banks, in particular, have taken advantage of this space. Employee-owned businesses that are growing should have equal access to bank funding for expansion as other businesses. This means they should be able to secure loans and financing from banks to support their growth. This level playing field ensures that employee-owned businesses can continue to thrive and expand like any other business.
For more information on employee-owned businesses at Geldards, contact Debra Martin and Andrew Evans for their expertise.