Blog articles are usually representative of what is currently on the radar with our clients and this one is no different – How many people actually read the small print?

The issue seems to be more prevalent at the moment as the relationships between lenders and their borrowers seem to turn sour faster than ever.  Realistically however the relationship has probably been going the wrong way for quite a while, and it is like your car, ignore those niggling sounds and one day something will let go and it’s the AA to the rescue.

It is when things don’t work with lending arrangements that lenders are relying even more on some of the things they were less concerned with in the past.  Three principle areas come to mind:

• Financial covenants associated with a loan
• Personal guarantees
• All Monies clauses

Let’s look at the first one – Many commercial (as opposed to Buy to Let – B2L) mortgages and borrowing facilities have covenants relating to loan serviceability, tenancies, loan to value and the production of timely Management Information (MI) lost in the pages of conditions associated with the facility.  When times are good lenders often overlook these, with markets tighter than they were and a lot of valuations being lower than when the money was taken in the first place, these are now being vigorously enforced.

We are getting new clients coming to us because their own bank want them to reduce their borrowing because the property has down valued, but I hear some say, how do they know, well the concept of desktop valuations have always been there, it doesn’t take a rocket scientist to ask the original valuer for their comments on your property even though you think they have never been back.

Others are now finding that MI they haven’t been providing is now being chased, and if a business is on top of things it should have them anyway, so sometimes a blessing in disguise, but the retained profits (or lack of) in your business could worry some lenders.

Changed the tenancy? Maybe your borrower should have been told, some B2L lenders are now insisting they are advised at every change of tenancy, and that could be every 6 months in some cases.

What about the second area – Personal Guarantees (PG’s) – If you run a limited company expect to give them, it is rare unless the directors of the company don’t own enough shares to control the business, that you will get away without providing them, and to be fair it is an acknowledgement on the director’s part that they are prepared to support the borrowing in the first place because it is usually the lender who has put more into the project than the borrower.  In the runaway ‘noughties’ PG’s were rarely considered as a risk indeed a lot of folk signed them without getting the independent advice that they should have done prior to giving them.

When the facility goes wrong, the lender can and do call their money in, so be wary of facilities that have an end date on them (how many developers do we know who have built their developments out and can’t sell or refinance them?), or covenants that could cause the dreaded ‘Event of Default’ and allow them to repossess or appoint a Law of Property Act receiver to collect the rents, because when they do and ultimately crystallise the amount of the debt, they will be coming to the Guarantors for the inevitable shortfall.

Finally, what’s an ‘All Monies Clause’ – simply put somewhere in the depths of the mortgage small print most lenders include this short bit of wording linking ALL debts and liabilities across the lenders various arms in the event of a default, and it can collapse a perfectly well functioning facility if another part of the associated facilities go wrong.  So whilst this is just an example, if you have your mortgage with a bank on your business or commercial premises, a series of B2L loans with that bank’s subsidiaries, and overdraft and maybe even a credit card with the same group and one goes wrong, it can cause an event of default with them all.  As we say avoid as much as you can putting all your eggs, both personal and business, into one basket because the chances are you will never fully be in control of that basket’s handles.

So, all I would say is look at the small print, it may not go away if it is a condition of a loan, just understand what you are signing up for and what will be the implications if you can’t adhere to them – You might lose the lot!

If your business is in this situation or you know of one to which this applies, do get in touch and we will do our best to help them.

Asset rich and cash poor, how many times have we heard that phraseology?  But what about ‘We can afford to pay it (the interest) and repay it on time but don’t have any money to put in’?  The concept of self certification mortgages has finally been put to rest and are no more, but we are still being asked to help businesses that espouse the latter scenario in that they will make good money from what they are doing, so repayments are easily covered, and will make a significant profit a short way down the line, but the lenders don’t like this approach.

The old saying about a banker is that he is someone who lends you an umbrella when the sun is shining but wants it back when the rain starts falling, very apt, but it should be remembered that is what they are, bankers, not property investors, not widget makers, not housing developers, so to expect them to take an entrepreneurs view rather than a risk takers view is wishful thinking.

Bankers want to see their borrowers share some of the risk, which is why even if a property can be bought cheaply, under what is deemed to be its market value, it is unrealistic to think that ALL of the money can be borrowed so some lenders have reverted to their ideal which is to lend a percentage of the market value or the purchase price whichever is the lower so that in every case the borrower is risking something, even if it is not cash but a charge on some other assets they own.

A good development deal is another case in point, the end profits may be good, but if the developer is taking no risk at all at any stage, even if they actually recoup it later, lenders won’t either.

Borrowing is a partnership, so put something of value on the line and you will get the support, try to do it without and the project will never happen.

The market has changed but realistic borrowers will still get the support their project deserves, they may just have to put the banker’s hat on for once.

If you have a proposition that merits investigation, do visit our contact page and get in touch, we will be honest enough to let you know what can be achieved.

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.