Prospective clients often find their way to us as they have approached their own bankers to support their borrowing requirements and are astounded after years of loyalty to the bank concerned, their applications are being rejected.  Indeed according to the Institute of Directors “… nearly 60% of businesses seeking bank finance in 2009/10 were rejected by their bank”.

According to research from a credit reference agency often used by the banks and the Forum of Private Business (FPB), a fifth of all small business owners who have been refused a loan are completely in the dark about why they were rejected.

The most common reason given to businesses that are told why their loan was denied is inadequate security. More than 40% were given this reason but the lenders are not pursuing the government backed opportunities to get around issue.

Computer Says NO!

A further 30% were dismissed because the sector they operate in is deemed “high risk”, while 27% are let down by their credit score. 

The former is difficult to challenge because it is subjective and we have no access to the lenders own level of experience in the relevant sector, we can only rely on general business sentiment and I think in certain circumstances that is all the lender’s underwriter is doing. 

The latter is again difficult to challenge as despite what an individual business’s (or the owner’s/director’s) credit score is, the lender sets the threshold level to suit their purposes.

Martin Williams, managing director of credit reference agency Graydon UK, said: “It is vital that business owners and managers enter into a conversation with their bank in order to find out where their perceived business challenges lie. This will allow them to address these issues in future applications, considerably improving their chances of securing funding”. 

We would add here that this is an admirable approach but one often where one comes against a brick wall as your own bank contacts (the ones you got on well with before) are now so divorced from the underwriting process they are often in the dark themselves as to the thinking behind the decision as to be in a difficult position to advise.

We always suggest that some form of feedback is obtained why the refusal of support was given, and indeed we ask for it if it is not volunteered, but unless we were the originators of the application, the lenders will not tell us and it is up to the business owner themselves to get the right answers, and if they feel they are out of their depth here, we can help.

Phil Orford, chief executive of the FPB, said business owners needed to make sure they were presenting proper financial information, but also called on the banks to provide detailed reasons when loan applications are turned down.

“We have entered a new business landscape where a more collaborative approach between businesses and banks is required if the future of enterprise and the economy is to be a healthy one,” he said.

“Securing finance is the main priority of the vast majority of small businesses. Economic conditions remain extremely tough and, even when the economy does recover substantially, growth finance will be important to allow them to keep up with demand.”

Our aim at CFA is to ensure that all viable applications are presented in a format that the lender will understand, with all the background information we know will be sought and explore the options open to the applicant moving forward.  We are generally successful in obtaining a workable lending solution, but only because we have done our homework and preparation first to ensure we are painting the right picture, and of course do not waste everyone’s time submitting applications to lenders who patently have no appetite for our applicant’s business.

We can help at the early stage in preparing a robust business plan that not only looks at the strengths and weaknesses of the proposal, but goes deeper into the micro and macro opportunities and threats that need to be addressed.

If you have had a challenge, working with your existing bank, give us a call and let us see if we can help.

Many times the pervading view is that bargains can be had when buying at auction however, property auctions are not for the faint hearted and the risk can be that you go overboard in the heat of the moment.

Some bargains can be had at auction but usually only for those with the skills to capitalise, namely builders and developers who can add value to the stock and overcome the challenges that are often the reason why the property went into the auction in the first place.

I have seen 1st time buyers looking for a property that they can “do up” to live in but the fundamental point is that a lot are not mortgageable by standard means and often involve bridging for a short time until they are. A point to be aware of here is that some lenders, if strictly following the Council of Mortgage Lenders guidelines, may not be prepared to finance you out of the bridge for 6 months, so you need to know that the deal will stack up with 6 mths worth of bridging costs potentially being included.

A lot of stock ends up in the auction because there may be title issues, condition issues or in the case of a lender repossession they have to be seen to be getting the best price on the day, which the open auction is designed to achieve.

You also need to factor in that the 10% has to be paid on the day in cash (or draft) and you will lose it if you cannot complete because the fall of the hammer is deemed the actual exchange of contracts. Some auctions are also 14 day completion so watch out for those.

So what I would say is don’t discount it out of hand if you do not class yourself as experienced in these things, but do your own due diligence. Get the auction catalogues, select some suitable properties, view them critically, and decide what you think they are worth with all the tools that are available on the internet, go to the auction BUT DON’T BID! Just see what they go for and what sorts of people are buying them.

I would suggest you need to visit at least 5 or 6 auctions as an observer first to get a feel for things. If it is then right, surround yourself with the people who can help you, a capable broker like ourselves, a solicitor used to completing in auction timeframes (extremely important) who can also scrutinise the legal pack first, possibly a tame surveyor who might look at the property for you for a “drink” and maybe a builder who can give you the “warts and all” costs to turn the property into something that will have value.

The bane of my life is the amateurs who have watched only a few episodes of “Homes under the Hammer” or Sarah Beeny’s “Property Ladder” and think they can do anything.  Good luck to them if they enter into this sort of transaction, as long as they go into it with their eyes wide open, but many don’t, and remember the auctioneer’s guide prices are just to get people through the door and put “bums on seats”, they often bear no resemblance to what these properties may go for, but they alone obviously get some potential purchaser’s juices going.

We are often asked to help with funding auction purchases for commercial or investment purposes and we frequently need to resort to some form of bridging or short term funding to achieve that.  Do give us a call if you have seen something in an auction catalogue that catches your eye, but do it early on and we can do our best to guide you through the process should you intend to be successful bidding at auction.  Contact us here for further details.

It appears, finally, that someone has woken up to the fact that the lenders bailed out by the UK Taxpayer are not delivering on their promises to support the SME sector with business borrowing.

I was tickled by a comment on the BBC news this morning (09/02/10) from a spokesman from Lloyds Bank claiming that they are not lending to businesses as much as they agreed because no one is applying to them.  This is wildly off the mark as our experience has proved to us with banks making it fairly difficult to submit any proposition with a better than even chance of getting past their underwriters.

I am old enough to remember when the local bank manager had authority to grant facilities and as they lived on the doorstep they had their finger on the pulse of how their branch interacted and supported their local business customers.  They understood businesses and worked with them to move forward.

Times changed as the business lending function was centralised and faceless individuals made all the decisions and the idea of the old “Bank Manager in the Cupboard” (Midland Bank ads back in the 70/80s) went out the window.  It was at least starting to revert to the local Business Development Manager (BDM) having a much more hands on approach to local lending, when the common complaint at the time was that these people just got to the point where they understood your business and they were moved on to greater things and you have to tell your story all over again to someone new.

Then came the Credit Crunch (as we have all decided to call it now) and gradually the banks slimmed down their BDM teams and took any small link between small business and the bank decision makers away as EVERY transaction now has a tortuous task through the underwriting process.

We have always aimed to answer these faceless underwriter’s questions before they even get to ask them and that does mean having to garner much more background information from the client than was ever needed in the past, and these decisions being made about supporting small business are being left to individuals who firstly have never ever run a business in their life (I have always thought it would be a good idea for bankers to be seconded to industry for a portion of their development to see how the other half functions) and rarely if ever would lose their roles by saying no to an application.  After all they are only “protecting the Bank’s shareholders”.  The skill is in saying yes, and this skill is not being exercised as often as it could be.

The claim is that they are indeed still lending but at what price?  Definitely higher margins of at least 200bp above previous norms, double the fees, 40 – 50% shorter terms, much lower LTV’s and it is only the very good companies that can live with these.

My argument is that providing serviceability can be assured with a reasonable amount of headroom and the applicant is clean and paid for, the lenders should be looking to do everything in their power to help and deliver on the commitments made to the Government when they were bailed out in the first place.  They are in the risk business after all, and the rewards are very good now.

It just reminds me of Mark Twain’s apt definition “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”, well it has been raining but the sun is coming out again so let’s start sharing those umbrellas as promised.

The following is an extract from several articles posted by BT Business and Growing Business websites

New figures from Business Link have revealed that 45% of small and medium sized enterprises (SME’s) sampled have few if any systems in place to chase unpaid and overdue invoices

The poll of London SMEs also found that nearly a third are weak when it comes to management of their cashflow, while almost half have no idea of where their gross profit margin or breakeven point is.

These results have been released to coincide with the launch of Business Link’s new 10 point financial health checklist, which it hopes will help business owners keep their finances more in control. A copy of Business Links checklist can be downloaded here.

“Sound financial management should be the bread and butter of every business, especially during these tough economic times,” according to Matthew Perkins, a senior Business Link advisor, reporting to the British Chambers of Commerce

Smaller businesses (those with less than 10 staff) fared worse in the poll. Only 50% had a structured process in place to chase unpaid invoices compared to 72% of larger SMEs.

Perkins added: “As we head into the recovery period, understanding where your money is, following up your unpaid debts and knowing what your profit is, are vital to keep your business in the black and head for growth.”

We see many companies where this has become an issue and can introduce our Associates who have the skills to help point your business in the right direction, why not visit our website and we can see whether we can help.

An interesting conversation came up the other day when we were referred to as experts in our field, I beg to differ, I don’t think we are experts, but I do consider that we are specialists.

The definitions of expert are–

A person with a high degree of skill in or knowledge of a certain subject (adjective)

one with the special skill or knowledge representing mastery of a particular subject (Noun)

The definition of specialist is –

One who is devoted to a particular occupation or branch of study or research

I don’t think many can hold out to be masters of their subject indeed it is interesting that some “experts” appear to always be classed as experts even though they are no longer active in their field or continuing to learn at the same pace as they did before.

I know that the market place for our business is always changing and we have to use our skills to change with it, and that doesn’t just apply to our sector, I wonder how many experts in the field of VCR technology exist, or those that know everything there is to know about DVDs and CD’s – Technology is changing so fast that they need to change too.

I therefore accept that to be classed as a specialist in our field is not a bad thing, admitting that we do not know it all, and are continually ready to learn, but what we do offer is that quality of devotion to what we do. 

I know from personal experience that I probably give too much of my time and knowledge free to those I hope will benefit from it, and have been accused of giving people way more of our valuable information than they need without charging them for it.  But it works for us because at least clients know we have a passion for what we do.

Overall I’m constantly reminded of the phrase:

What is an expert?  – An “ex” is a has been, and a “spurt” is a drip under pressure

Specialism for me then!

Most of us will have come across the commonly accepted 80/20 rule attributed to Vilfredo Pareto namely that 80% of our business can be attributed to 20% of our customers, conversely 20% of our customers probably account for wasting 80% of our time, in other words the cause is often much smaller than the effect both positively and negatively.

A past mentor of mine always used to say you can take that one stage further and there is a 95/5 rule that exists out there as well and the effects can often be even more marked.

Take for example direct marketing, at its absolute best leaflets that come through the door have a 5% chance of being acted upon, for many reasons, I know for example that leaflets and flyers promoting car insurance only motivate me to any action once a year at renewal time.

Another big one has got to be those businesses that face to face network, our own experience is that 19 out of 20 people say it doesn’t work so don’t pursue it and allow it enough time.  Couple this with internet marketers who are always saying at times of challenge, like we have now, only 5% of businesses actually increase marketing budgets whilst 95% cut back believing that they are looking at a cost not an investment.

Is it no surprise therefore that 95% of the wealth in the UK is believed to be vested in 5% of the population, maybe those individuals were always going to be part of that 5% group and this is just the reward for their efforts.

Perhaps the biggest indication of this “rule” however has got to be those who use social media in some form or other.  Most viral community forum operators know that 95% of the contributions come from 5% of the members, and it doesn’t matter which forum you are on, it is exactly the same.

It is the same with LinkedIn, Twitter, Facebook, blogging et al, of all the people in my growing database only about 5% are embracing these changes.  The ones I admire the most are the ones that still don’t understand it but do it anyway, as I’m sure a lot of the 5% wealthiest in the UK didn’t fully understand or even enjoy what gave them their successes at some point.

The Christmas and New Year period always gives me an opportunity to reflect on the recent past and where we go moving forward, and I think just accepting that this “rule” does exist helps me ask myself the question do I want to be part of the 5% moving forward or the 95% sucking their thumbs and feeling hard done by – No contest I believe

The following was posted on Commercial Introducer.com

Fitch Ratings says that it expects European banks’ commercial real estate (CRE) exposures to remain a material credit issue through 2010, and refinancing will be a particular concern in 2011 and 2012 when a high volume of property loans fall.

This may lead to further negative rating action on European banks relating to their commercial real estate exposure, though action is likely to be limited in scope.

Gordon Scott, Managing Director in Fitch’s Financial Institutions team, says:“Many banks have not yet reported substantial losses on their CRE portfolios, despite significant declines in asset values in certain markets and segments. This is partly due to timing and serviceability, as long as loans are being serviced banks are unlikely to report the loan as non-performing.

“However, with a large proportion of loans in negative equity, Fitch expects pressure on borrower cash-flows and increasing loan covenant breaches to result in further losses.”

Corporate defaults typically peak after economic contraction ends, suggesting that loan losses (which themselves will lag default) may not peak until into 2010. Lenders may be protected to varying degrees by their underwriting standards, particularly those whose exposure is in good locations, with good quality tenants, and longer leases.

Loans written prior to 2006-7 at lower loan-to-values (LTVs) will be better placed to withstand additional pressure. A prolonged period of economic weakness and/or further asset value declines could result in a significant rise in defaults.

Scott says:

“Banks are adopting a more conservative approach in terms of new underwriting and pricing of commercial property loans. Many banks are also under significant pressure from regulators, shareholders, politicians and other market participants to de-risk their balance sheets, which has potential to reduce the overall supply of credit to the sector.

“All of these factors will severely limit borrowers’ refinancing options for the wave of European property loans with high LTVs that mature in the four years from 2010.”

Irish banks’ commercial property exposure remains very high relative to tier 1 capital, and they are particularly exposed to development finance. In the UK, exposure has risen sharply since the early 1990s and is high relative to tier 1 capital at the two state-backed banking groups (Royal Bank of Scotland Group and Lloyds Banking Group, both rated ‘AA-’/Outlook stable) though recent capital-raising initiatives will reduce this.

Spanish banks’ CRE lending has quadrupled since 2002. Most medium and large sized cajas (regional savings banks) and medium sized universal banks have high exposure to the property sector (around 30% of total lending) making them vulnerable to further adjustments.

In Germany, CRE exposures also represent a high proportion of tier 1 capital at many Landesbanks and specialist property lenders. Exposure to the most stressed markets – the US, the UK and Spain – may pose a serious challenge for individual banks’ asset quality. More than 40% of German banks’ CRE exposure is international, according to Fitch.

Rating action is possible for banks that Fitch considers to be most exposed to downside risk from continued adverse market developments, particularly if in the agency’s opinion loan impairment reserves appear inadequate and/or capital appears to lack sufficient buffer to deal with potential problems.

It should be noted, however, that many of the European banks most exposed to CRE already have low or weak Individual ratings; while their stronger Issuer Default Ratings are driven by support. This is likely to limit the number of potential negative rating actions.

The report, “Banks’ Exposure to European Commercial Real Estate,” is available at www.fitchratings.com. Fitch is undertaking a more detailed bank-by-bank analysis and will provide further commentary as more data is available.

The following is a distillation from the various accountancy contacts we work with and hopefully summarises the main themes discussed by the Chancellor.

Pre-Budget Report December 2009

The Chancellor’s speech held few surprises and included the expected windfall tax on bank bonuses. Spending cuts and tax increases were announced to fund the recent bail out of the banking sector and reflate the economy. A summary of the expected changes to tax, National Insurance and VAT follows.

Tax changes announced

Bank Payroll Tax

This tax will only affect bonuses paid directly, or via an intermediary, that exceed £25,000. The report describes the various banking institutions that will be included. All of our High Street banks and Building Societies are going to be affected as are asset managers, hedge funds, private equity and other similar businesses. The various terms published in the PBR are set out below:

• Rate of tax to be applied 50%
• Legislation will include anti-avoidance provisions
• Will apply to all discretionary and contractual bonus awards from 9 December 2009 to 5 April 2010. There will be an exception for contractual bonus entitlements where the payer has no discretion as to the amount of the bonus because of a contractual obligation existing at the time of the Chancellor’s announcement.
• Bonus is defined as including cash, benefits or loans.
• The Bank Payroll Tax will be payable on 31 August 2010.

The PBR also states that Bank Payroll Tax will not be taken into account when calculating the bank’s profit or loss for corporation tax or income tax purposes.

Research and Development Relief

Presently, to qualify for R & D relief, intellectual property associated with an R & D claim has to be owned by the company making the claim. This restriction is to be abolished for accounting periods ending on or after 9 December 2009.

National Insurance

Increases from 6 April 2010

• The Lower Earnings Limit will increase by £2 a week to £97 per week
• The special Class 2 rate for Volunteer Development Workers will increase by 10p to £4.85 per week.
• All other NIC rates are unchanged.

Increases from 6 April 2011

The main rates of NIC will be increased by an additional 0.5% over and above the rate increases announced in the Pre Budget Report 2008. The increased rates will be:

• Class 1 and Class 4 main rate NICs, 12% and 9% respectively
• Class 1 employer rate 13.8%
• The additional rate of Class 1 and Class 4 NICs, 2%.

Capital Gains Tax adult placement carers

From 9 December 2009 any person who disposes of a residential property that has been partly set aside for use under a local authority adult placement scheme, will not have their private residence relief restricted for capital gains tax purposes.

Pensions – Restricting tax relief for high income earners

This will affect individuals with incomes of £130,000 or over who, on or after 9 December 2009, change:

• their normal pattern of regular pension contributions; or
• the normal way in which their pension benefits are accrued;

and whose total pension contributions/benefits accrued exceed the special annual allowance of £20,000 a year (or in some circumstances £30,000).

Please call if you would like us to quantify the effects of this change should you be affected.

Inheritance Tax nil rate band freeze

The promised increase in the nil rate band in 2010-11 to £350,000 has been withdrawn. It will remain at current levels, £325,000.

Legislation is also to be introduced to cover the avoidance of IHT using certain trust arrangements involving property. This will only affect transactions entered into after 9 December 2009.

Shared Lives Carers – new tax relief

From 6 April 2010 a new tax relief is to be introduced for Shared Lives Carers who:

• provide accommodation, care and support for up to three individuals who have been placed with them under a local authority Shared Lives placement scheme; and
• share their home and family life with the individuals placed with them under the Shared Lives scheme.

The new relief will be available per household and will consist of:

• £10,000 fixed amount per tax year;
• £200 per week (or part week), per placement aged under 11; and
• £250 per week (or part week), per placement aged 11 or over.

If income from the caring activity does not exceed the tax free allowance for the year, carers will be exempt from tax on their earnings from Shared Lives Care.

If income exceeds the tax free allowance carers can choose to pay tax on:

• Their total receipts less the tax free allowance, or
• Their actual profits applying the normal tax rules for businesses.

Furnished Holiday Let (FHL) property

From 6 April 2010 for individuals and 1 April 2010 for companies, the expected withdrawal of the special tax rules, as announced in Budget 2009, for FHL property is confirmed.

From these dates earnings from these properties will be treated the same as other property businesses.

If you own property presently benefiting from the favourable FHL rules there is a short window of opportunity to take advantage of the existing rules. Well worth a visit to discuss your options with us, if you have not already done so.

No car tax for electric vehicles

From 6 April 2010 the company car tax charge for company car users who drive a car propelled solely by electricity will be reduced to 0%.

A similar reduction to 0% will apply to drivers of electric vans.

The measure for cars and vans is introduced for 5 years and may well lead to an increase in interest in electric company cars as tax free perks.

Increase in fuel benefit charges

From 6 April 2010 the figure used as the basis for calculating the benefit of private fuel for the use of a company car is set at £16,900, this is to be increased to £18,000.

The equivalent figure used to set the basis for private fuel in vans increases from £500 to £550.

100% Allowance for electric vans

If you purchase a new electric van after 6 April 2010 (income tax payers), 1 April 2010 (corporation tax payers), you will be able to claim a 100% capital allowance.

The vehicle must be unused, not second hand.

The allowance is subject to the Government confirming that the facility is allowable State Aid.

VAT flat rate scheme changes

The flat rate scheme percentages are to be revised from 1 January 2010 to reflect the reinstatement of the 17.5% VAT rate on 1 January 2010.

Please note the rates will not return to those used prior to the December 2008 change to 15% VAT. A new table of rates should be available soon on HMRC’s web site which will take into account the rate change and other data about VAT liabilities in each sector.

Surveyors expect to see rent rises in the New Year as the number of rental properties coming onto the market fell for the first time since January 2008, says the latest RICS Lettings Survey.

The following from the RICS Website -

Shortage of new instructions bolsters rental outlook

• Tenant demand picks up speed but the new instructions net balance turns negative for the first time since the early part of 2008
• Downward pressure on rents appears to be easing with the forward looking rent expectations series moving smartly back into positive territory
• London is leading the turnaround in rental expectations followed by the North and the South East

Tenant demand for residential property picked up speed in the three months to October. A net balance of 16% more surveyors reported a rise in new tenant lettings over this period compared with 11% in the previous three months.

Within this aggregate figure, demand picked up particularly sharply for the renting of houses; the positive net balance in this sector of the market jumped from 6% to 22%.

Meanwhile, the net balance of respondents recording a rise in demand for flats remained unchanged, albeit still in positive territory, at 12%. More significantly, the latest survey shows the new instructions net balance to have fallen for the first time since the early part of 2008.

The Full Link to the RICS Survey download 

The following article is reproduced from The Telegraph Online

Investors pile into commercial property as Isas sales hit record levels, say the IMA

Commercial property was the most popular sector in October as investors renewed their appetite for Isas, according to the Investment Management Association.

By Paul Farrow
Published: 2:29PM GMT 01 Dec 2009

Investors have renewed their appetite for commercial property having endured dreadful returns for the best part of three years.

According to the Investment Management Association, the property sector was the highest selling sector in October, accounting for £367.6 million of net retail sales – the highest since May 2007. Property funds have seen positive net retail sales for seven consecutive months. It is in stark contrast to last November and December when property was the lowest selling sector.

The IMA added that gross Isa sales (£965m) were the highest ever for any October – and the highest monthly figure outside the Isa season since June 2000.

The demand for property has coincided with an upturn in performance. British commercial property posted the third consecutive monthly capital growth in October, at 1.9pc, according to the IPD UK Monthly Index. Since the market’s upturn, which began modestly in August, UK commercial property has produced a compounded 3.2pc capital growth. This has reduced the fall since the trough in July 2009 to -42.4pc, as measured by the IPD UK Monthly Index.

Tens of thousands of investors were persuaded to buy into commercial property at inflated values in 2006 and 2007, only for prices to come crashing down. Many funds fell in value by more than 40pc.

Funds that invest in actual bricks and mortar are not exactly the most liquid of investments, as the credit crisis showed. The crisis brought property deals to a halt, causing liquidity to dry up. Falling fund values triggered a rush for the exits as investors tried to withdraw their cash. Many funds imposed “exit fees”, suspended trading or introduced a notice period to stem outflows.

But investors appear to have put the turmoil behind them and money has been pouring in. So much so that last month it emerged that Hermes Real Estate and Threadneedle Property Investment were staggering cash inflow into their open-ended institutional property funds so that fund mangers were not under pressure to invest.

Billions of pounds, many of which is coming from overseas, is targeting UK commercial property after a sharp fall in asset values since summer 2007. However, investors have been left frustrated by a lack of quality assets on the market as cash-call bolstered property companies avoid selling into a distressed market and banks take their time to unwind distressed portfolios.

This had caused Threadneedle to halt new allocations to the Threadneedle Property Unit Trust, which grew from £310m at the start of the year to more than £400m at the end of the September. The fund had reached its maximum liquidity limit of 20pc, and therefore new cash will not be taken until the fund has made acquisitions.

“All the money that went out of the fund has come back,” said Don Jordison, managing director at Threadneedle Property.

©www.telegraph.co.uk