Corporate Finance Associates Blog

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.

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.

As usual our posts on this blog are reflecting our efforts to satisfy all of our clients in the most appropriate way despite what seems to be going on around us.  This one was prompted by a comment from an architect at a breakfast meeting I was at today when he mentioned the number of single house building developments he is working on have soared.

We are often asked via our introducers and indeed via the enquiries on our website to help arrange funding for residential development projects and the first question we always ask is ”where is the project located?” – The answer often determines the level of support that the UK lenders are prepared to give.

The title says it all, there is indeed a huge portion of the UK that is north of Watford, but to the vast majority of the lenders that have set their stall out to support the UK development finance market, it might as well be another planet.  Admittedly, the money seems to emanate from the South East and inside the M25 it appears that nothing can go wrong, are they being short sighted or just prudent?

On a recent exercise on a fairly chunky development proposition in the West Midlands, which is not quite the end of the world, we used the details of those current lenders in the UK, that have said they support development funding, gleaned from the latest copy of ‘The finance Book’ to find out whether they would even consider the application.  The result – out of 28 lenders approached, only 2 were willing to quote anything near reasonable terms for the business with the high street lenders being particularly unwilling.  The main response was “it is too far away”.

I don’t know the numbers but it wouldn’t surprise me if more people lived and worked ‘North of Watford’ than south of there, and they all have to live somewhere, so come on folks, the numbers might not be so big, but the market is, and the argument is always there that a range of smaller development projects across a wider series of locations does mean that the lenders are not putting all their eggs in one Country (Greece) basket.

If you do have a small residential development (Up to say 10 houses) ‘North of Watford’ do get in touch, because we now know who wants to play.  You can contact us here.