CAMPARI MODEL
A number of funders assess business lending/funding proposals using the “CAMPARI MODEL”. Below is a summary of the components of “CAMPARI” and what funders look for under each heading. Whilst not all funders will use the CAMPARI model they will almost certainly need to be satisfied that your proposal stands up to scrutiny in all of the areas that it covers.
CHARACTER
This is about the track record of the business and its key people. Funders ideally want to support businesses who have always delivered in the past i.e. met their obligations, have a clean credit history, have always kept within their banking facilities, and have a good reputation in the market place.
Funders will always instigate credit checks against both the company and the key individuals behind it. If there are any past problems which will be highlighted via a credit check be honest and up front with the funder about the background to them.
Funders are more likely to be forgiving of “one off” problems in the past if they can be convinced that there will be no repeat in the future.
ABILITY
This is about whether or not the correct skills set / experience / management ability is in place for the business plan to be achieved. They will want to see an experienced management team with the right balance of qualifications, skills and experience.
If there are skill gaps within the management team and key staff a potential funder will ask how this is to be addressed e.g. contracting/out sourcing. One of the benefits of equity funding can be that the potential investor may have a level of expertise or knowledge of the business and market that he/she can add value to the business and overcome any potential issues in this area.
MARGIN
This is about the risk/return equation from the funder’s perspective. Does the deal provide the right sort of return for the risk involved? Any funder will seek to obtain a satisfactory return from its investment or loan. The return will be driven by the perceived level of risk taken on board by the funder.
In the case of a conventional bank loan this will take the form of an interest margin and initial arrangement fee. Over recent years margins and fees have risen as a result of the Banking Crisis and the increasing cost of capital. In the case of equity finance the return is represented by the funder’s stake in the business which takes the form of a shareholding or equity stake. This will vary depending upon the amount of financial support provided.
PURPOSE
This is about how the money is to be utilised and whether this is consistent with the purpose outlined in the business plan and funding proposal. Ideally the amount and type of funding provided should make sense in the context of the funding proposal.
A simple example is that a lender would not normally look to fund a major asset purchase by way of overdraft unless the resulting cash flow was so strong that the borrowing could be repaid comfortably in the short term i.e. 12 months.
The purpose for which the finance is required should be clearly set out in the business plan which is effectively the blueprint for the business and should incorporate financial projections based upon sound assumptions.
The lender/investor should get a very clear idea from reading the business plan of what the business is all about including its unique selling points and how well it relates to its target market. It should also cover how it will promote itself effectively and what resources are needed to operate competitively in its chosen market place. This all has to make sense to the lender/funder who will need to be convinced of the overall viability of the business.
AMOUNT
This is about ensuring that the correct amount of funding in place. Too much and the business might find itself paying an unnecessarily high level of finance costs, too little and cash flow difficulties may quickly materialise resulting in an unwelcome request for additional funds and a loss of credibility.
In this regard having credible financial forward projections based on robust assumptions is a vital ingredient towards obtaining the required amount of funding for the business. The forecasts should ideally be produced professionally unless there is sufficient in house expertise. They should also build in a margin for contingency e.g. a 15% fall in sales to ensure that the business is able to ride out periods of temporary difficulty.
As regards how much a funder will lend towards a proposal this varies, depending upon the circumstances. For the purchase of commercial property most lenders will lend up to 70%/75% of the property value, depending upon serviceability.
However for increasing working capital requirements, e.g. relating to business expansion, lenders will expect their increased commitment to be matched by the business owner’s own contribution. That might be already evident from an increased net asset position in the balance sheet or there might be a requirement for the owners of the business to inject more capital of their own.
This inevitably can restrict the expansion of high growth businesses which may have a large working capital requirement to meet a major upsurge in orders, although there could be other solutions available e.g. invoice discounting and these should always be considered.
However this might be where equity finance can come into play in that the investor provides the bulk of the risk capital in return for an equity share in the business. This is often a potential solution for high growth / highly profitable businesses which have exhausted all other conventional bank related options.
REPAYMENT
This is about the ability of the business to repay the funds lent or invested within the timescale required. The business plan and financial projections must clearly demonstrate that the business will have sufficient cash flow from its operations to achieve this, allowing for contingencies.
In particular banks will be keen to see a cash flow forecast that shows that the proposal does not put a strain on the working capital needs of the business leading to pressure on cash flow. Business owners often lose sight of the fact that profit doesn’t always equal cash and it is lack of cash that is most likely to threaten the ongoing viability of the business.
If the proposal does not clearly demonstrate that it is comfortably serviceable from cash flow, allowing a margin for contingency, it is very unlikely that debt funding will be secured. As regards equity investment there is no debt to repay, as such. However the investor is looking for a strong and sustained profitable trading performance which should enhance the value of the equity stake over time.
In any event all funders will need to be fully satisfied with the ability of the business to service its borrowings from cash flow and to generate future profits in line with its financial forecasts.
INSURANCE
This is about what protection is there in place for the lender if things go wrong. In the case of debt funding this is often achieved by the lender taking security both in respect of the company assets, e.g. debenture and a legal charge over property or from key individuals within the business e.g. personal guarantees from directors (sometimes supported by a charge over their personal assets).
As regards both debt funding and equity investment the funder will be keen to understand the financial background behind both the directors and investors and in particular whether they have both the wherewithal and will to inject further capital into the business if necessary.
Contingency planning is important here. What can the business do to protect itself if sales are 20% short of budget? Will the business be able to reduce its overheads to compensate? How much spare capital is available to support the business through a difficult period? As a quick guide the following information is likely to be needed by a potential funder before being able to assess whether or not to lend or invest.
A lender will automatically undertake personal and business credit checks. If your business proposal covers all of these areas successfully and your business plan is well structured and compelling there is no reason why you should not successfully secure the funding you need for your business.
Five S’s to Lending
The 5's to model is the more modern way used to assess lending cases.
S = Serviceability
S = Security
S = Stake
S = Secondary Option
S = Suitability
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Written by
Maurice Sardison
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