Nearly 5 Years on – What is happening with commercial lending?

As a lot of followers of this Blog tend to know, I tend to blog about the challenges our clients are going through in the current credit climate and the antics of the various lenders and I must admit we have never been busier with enquiries, but getting them across the line remains a continual challenge and that seems to come down in both the lender and borrower camps, so here are just a few of them.

Not giving us the full picture

We always set ourselves out as effective underwriters of new borrowing proposals, because if we can’t underwrite and support a deal, how can we ever persuade a bank to do likewise, but we seem to be plagued by clients telling us one thing that we subsequently find to be different when drilling down into the facts.  At least it gives us an opportunity to pose any questions, the lender doesn’t give anyone that chance preferring to say ‘No’ and to move on to more vanilla lending.

We do need to know ‘who’ owns the properties, ‘where’ all the income comes from, ‘what’ do they need the money for, ‘how’ they are going to repay it (especially if they have just got started or the property isn’t let yet), and above all ‘why’ they are doing it.

The credit histories seem to rear their heads too, when we find out that the ‘Why’, is often a push from the existing lender

Not declaring all the income

Borrowers can’t have it all ways, if they don’t declare the incomes, they may well have a lower tax bill, and even be receiving  ‘Working Family Tax Credits’, but if this is not the true picture this is Money laundering – short and sweet – it is evading the system.

I have even been asked by clients ….”How much income do I need to declare then to get this funding?……  my reply is as always, “All of it”.  Lenders will only lend when they feel the applicant is being truthful, any doubts anywhere and the deal will die, we will kill it long before it gets to a lender as we have our own reputation to consider.

Not being realistic

From the lenders prospective just setting the rate too high and the amount advanced too low (Because the former causes serviceability issues and results in the latter), may look good if the lender reports that they have issued an offer, but they can’t then say that the borrowers are not taking them up, because they have made it difficult for the borrower to do so in the first place. 

If as a lender you don’t like one specific sector, just tell us clearly at the outside not hiding behind uncompetitive terms that won’t be taken up

Taking your time

We can’t put a full proposition to a lender without everything we have asked for, I liken it to dialling a telephone number and missing out some or most of the numbers, you will never get through to the person you want, we need it all.

Lenders too, if you have to farm our enquiries around the country to your ‘local’ representative, please do it quickly because 7 – 10 days can disappear very quickly if nobody picks it up and runs with it.  A quick ‘No’ is a result; at least we know where we stand

Finally, we have those that are living in the past

It reminds me of my youth and the music I liked back then (Living in the past – Jethro Tull Album), the Credit Crunch has been with us for over 5 yrs, as at the time of this blog post the base rates have been at 0.5% for 44 mths, but we still need to emphasise to our borrowers that before, as long as you were ‘Warm and breathing’ you could get 85% LTV, 30 yr repayments, interest only and the ability to self certify your income – they are ALL gone.

Banks are looking for lending between 5 and 10 yrs maximum, some secondary banks will do longer I know, but they do need to confirm and substantiate incomes, an accountant’s reference is NOT enough, anything above 70 – 75% LTV is wishful thinking unless you are a doctor, and expect to be paying 100bps more for you money, and that is even with the various government schemes in place.  And as for interest only, this is as rare as rocking horse manure.

The banks are both having to comply with major banking directives that force them to hold more capital but also act more responsibly in their lending approach and their own attitudes to risk, so it is not all their fault, we perhaps have just moved back to what was realistic in the mid 90’s and before the floodgates opened.

If you do have a project you would like help with, or perhaps your own lender doesn’t want to work with you any more, do visit our contact page and get in touch, we can often help.


Any Price Business Finance – where’s it all going?

There have been some interesting changes in the commercial and business funding markets in recent weeks, from lenders appearing to offer better rates than they actually are, increasing their minimum margins, shortening their loan terms and the latest to cross my desk today, a well known cash lender well used to pushing their wares on the TV to individuals now considering the option of business loans too.  So what is happening – let us take them one by one.

Money costs – we can’t get away from that and  the current bank base rate of 0.5% has nothing to do with it as it is an arbitrary figure, but still used by many lenders (predominantly the high street banks) as a basis over which to add their margin.  The true cost of funds are much higher, being between 1.05% and 1.1% and can easily be checked in the financial press by looking for the prevailing London Interbank Offered Rate (LIBOR).  LIBOR always was about 15 – 20 bps (basis points – equivalent to 0.15% – 0.2%) adrift from bank base rates before the credit crunch and you can see the gap is huge now.  We are now coming across lenders who are quoting 2.9 % margins but not making it clear that it was a margin over LIBOR so the equivalent of 3.5% over bank base, so all is not transparent so do check if it applies to you, smoke and mirrors!

I have always said the way to reduce risk is to lend a lower proportion of the asset value, not increase the rate, but in a market that lacks the ability for the business to ‘get the hump’ and just take their borrowing to another lender, we are seeing many of the lenders increasing their margins by 0.5% across the board, why, because they can.

The biggest change we are noticing now is the willingness to consider longer term lending.  Pre Credit Crunch commercial funding over 25 – 30 yrs was available, the number of lenders offering those terms today has fallen dramatically and usually they come with a premium in the interest rate to boot.  Major lenders are now getting to grips with the Basel III capital adequacy requirements, which in a nutshell means that all lenders need to have a certain amount of capital available to back their lending.  Currently longer term lending requires a greater requirement to back up the lending so the answer seems to be a proliferation of loans being sanctioned on 3 and 5 yr terms.  Shorter terms bring their own challenges, principally in that as few commercial lenders still consider interest only funding, a short term then makes the loan repayments unaffordable.  Some lenders will calculate their repayments based on a longer term (say 10 – 15 yrs) to make things work but what happens in 3 – 5 years when these loans all need refinancing or redeeming, will it be an opportunity for the lenders to say ‘Thanks but no thanks’ – time will tell.

The big one for me is that the Press reported yesterday that Wonga intend to move into the business funding arena and their potential rates are eye watering.  Try this on for size – rates of between 0.3 and 2% per week, loans up to £10k, repayments weekly and if you miss one, immediate penalty charges.  You will be able to borrow up to 52 weeks but with arrangement fees of between 1 and 5% –  With Wonga’s consumer rates being calculated as up to 4,000% APR, how dastardly are the business rates?  Well I don’t know, as until you apply to them you don’t find out what they will offer you but even on a rough calculation using one of the online tools we are talking of an APR of over 115% – and you thought bridging rates appeared scary!

Anyway, what it does mean is that lenders are still lending, albeit on terms that vastly favour them and if you have a project that you need help funding and you want someone with the knowledge to wade through this financial morass, gives us call and we can see whether we can help.


Have the Government got it right this time?

With the formal budget due tomorrow a little snippet  in the form of the National Loan Guarantee Scheme (NLGS), was launched today, 20th March 2012, and it is designed to help smaller businesses across the UK access cheaper finance.

The Government is using the UK’s budget credibility in financial markets to provide up to £20 billion of government guarantees on unsecured borrowing by banks, enabling them to borrow at a cheaper rate. Around £5 billion in guarantees will be made available in the first tranche.

Participating banks will pass on the entire benefit that they receive from the guarantees to smaller businesses across the UK through cheaper loans. Businesses that take out an NLGS loan will receive a discount of 1 percentage point compared to the interest rate that they would otherwise have received from that bank outside the scheme.

The Chancellor is quoted as saying: 

“The Government promised to help small businesses get access to lower interest rates. Today, we deliver on that promise with a nationwide scheme. It’s only because we’ve earned credibility with our deficit reduction plan that we have low interest rates, and it’s only because of this scheme that we can pass the benefits of those low rates onto businesses.”

The sector they are aiming at are those businesses with an annual group turnover of up to £50 million.  The Government is not guaranteeing individual loans to businesses unlike the Enterprise Finance Guarantee Scheme that has been around for a while now, and thus not taking on the credit risk of loans made under the scheme. The banks retain the credit risk and therefore their usual lending and credit parameters will apply, so herein lay any challenges, as principally we are finding it is the obtaining of the funding in the first place that is at issue, the price is a secondary concern.

My personal opinion is that this will make very little difference because if the banks are still not going to lend in the first place this initiative will have limited take up, indeed we were advised this morning that Barclays are using the facility to market their funding services by offering a cash back equivalent of the interest rate reduction and keeping their pricing as it was before, so not necessarily exactly what the government had in mind.

Time will tell but if you have a project that could fit this scheme do get in touch and we can do our best to arrange the funding for you.