Corporate Finance Associates Blog

The Conservative Liberal coalition’s emergency Budget was described as “courageous” and “decisive” by international think tank, the OECD.

The Budget had promised to be tough, delivering cuts in public spending and tax rises intended to start what was expected to be a long journey to pull Britain out of an economically challenging position. George Osborne said in the speech that this was a Budget that would “pay for the past and plan for the future”.

The measures George Osborne delivered, focused primarily on cuts in the public sector, including a review of public sector pensions to be lead by John Hutton, together with tax rises which will hit every tax-payer in the country and the massive overhaul of welfare benefits.

Rather than make this an exceptionally long post the following is a summary of the key points from one of the partners we associate with.

Budget Summary

Thanks to Hayward Wright Ltd for their permission to reproduce it.

We always welcome your feedback and comments.

When creating articles for this blog, I do tend to reflect on what is fairly high on our radar at any particular point in time and over the past months we have had our fair share of enquiries from businesses that choose not to declare all of their trading incomes, and it is rare that we will ever be able to help them.

In the belief that under declaring actual incomes, especially with cash based retail businesses will mean that the business owner will pay less tax, they fail to understand that when they want to borrow money, this failure will mean that they will not get the support that they desire.

Prior to what we now call the ‘Credit Crunch’ there were a significant number of lenders who would allow a business owner to ‘self certify’ his income and that they had the capability of repaying any borrowing they took out.  The result were a lot of businesses that did achieve that, but emerging from the woodwork over the last 2 years have been those that were never earning what they were declaring and got into difficulties.  Is it no wonder therefore that lenders are now asking more questions?

It only takes an analysis of an individual’s income and expenditure to see that these figures do not tally, as the level of expenditure cannot be justified or supported by the income that is actually being declared, and to expect that lenders will not cross reference these figures with the accounts that are submitted would be naïve in the least.

We are constantly advising potential applicants who seem to have no qualms about this is that we will not be able to deal with them unless they are honest in their dealings and employ the services of a good accountant to work with them, as the better ones are very skilled at mitigating any tax liability anyway.

As a reputable organisation we are obliged to have a robust policy on money laundering and have the means of reporting our suspicions.  What businesses need to understand is that money laundering is not all about ‘white powder’ and other ‘iffy’ substances and their trade, but any undeclared or black economy dealings that are operating from the point of view of evasion.  Property is a classic scenario where some of these things take place, so expect to be scrutinised.

Just remember avoidance (using a good accountant) is legal, evasion is illegal, and unless applicants come clean they will need to arrange their funding elsewhere or take their chances with the private lenders who may not have our, and most reputable brokers, scruples.

Following my earlier blog item relating to the fact that from the IoD’s figures nearly 60% of businesses have failed in their applications for funding , a new phenomenon is emerging, being that of organisations that promise the earth and rarely deliver, only after having parted the client with a significant amount of their cash!

Commonly known as Advance Fee Fraud this is where an unscrupulous broker (or claim to be a broker) promises access to an eye watering array of financial deals that really get the juices going, what with “advances up to 85% LTV” “rates from 1% above bank rate” “no credit checks” and so on, all of which are patently unrealistic in the current credit climate, but the downside is a significant upfront fee for the “broker” to go to work for you.  However a few weeks or months down the line they fail miserably, but the fees were “non- refundable”.

The National Association of Commercial Finance Brokers (NACFB) of which we are Full Members have been actively campaigning to stamp this out and welcome all reports of this sort of activity whether from their own members or those not affiliated with them, as the aim is to maintain the reputation of the brokers that don’t promise pie in the sky but will work diligently to get their clients the best deal available.

Commercial brokers are, for the time being anyway, able to operate in an area that is not covered by strict FSA regulation, the downside is that anyone could set up shop tomorrow and start trading with few skills or knowledge to bring to the table, apart from a tremendous ability to convince would be borrowers to part with large upfront fees.

Do we charge fees, most definitely, as it allows us access to lenders who would not normally pay us any introductory fee?  What we do achieve due to our “bulk” application approach, where we can introduce a much larger amount of business to a lender over time are slightly better terms than if he were to go to his bank direct, often covering our fees within the first year.  We also charge a proportion of that fee at the outset but that is a nominal amount just to cover our costs and not the £5,000, £10,000 and even £20,000 up front fees we have come across recently. 

We rely on our reputation and having been around for the last 20 years we still want to be here in 20 years time so our fee structure is geared to successfully delivering an offer on the basis we have already outlined with our clients.

Just remember, when it comes to wonderful deals, if it seems too good to be true, it probably is.

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.

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.

We hear about green shoots of recovery and it is easy to get (or continue to be) complacent about the lifeblood of most businesses namely cashflow and in the fog of the Credit Crunch here are some financial faux pas to avoid

1. Tax Liabilities

it’s easy to get carried away and forget to build tax into your financial forecasts and budgeting. Use an accountant, they are less frightening than you imagine and can help you understand the need to budget for how much tax & NI you expect and will need to pay. A good one could save you the equivalent of their fees by their knowledge and actions too

2. Ignoring the Authorities

Even if you are setting up as a sole trader, you should notify the Revenue and Customs (HMRC) immediately. Penalties are payable if notice is not given within a certain timescale. The rules on financial penalties changed on 6 April 2009, so don’t be caught out by out of date advice. There will be more to consider if you are setting up a limited company, so make sure you get the right advice, again contact an accountant early in the life of your business.

3. Being too Cheap

Value yourself, your products and services. It can be hard for new businesses to compete on price as existing competitors may find it easier to undercut you, or have a larger client bank to work with. Try other ways of making your product or service attractive to new customers.  Why not offer a tiered service so that those expecting more from you are happy to pay more.  It has been said that an average business increasing their prices by 10% can afford to lose 25% of their customers (maybe those that give you the most grief) and still be as profitable as before.

4. Underestimating your Cash Needs
 
It’s often said that ‘Cash is King’, but it is so important it is worth re-iterating. Make sure you have sufficient levels of working capital. Many businesses fail, not because they are not profitable, but because they lack cash. The bank overdraft is not always the most effective way of achieving that especially if your business is growing.  Speak to us we may have a better alternative.

5. It will never happen to me

New businesses often rely entirely on one or two key people, and little thought is given to what would happen in the event of accident or illness. Plan for the unexpected and make use of insurance where appropriate. If you are a partner or a company director make sure you protect your business in the event of a partner or a co-director becoming ill or dying. Business protection can often be the first thing to go if things get tight, but the cost in the future will be massive by comparison.

6. Is Your Working Capital Working?

Even in the current low interest climate, there are reasonable returns to be had on your working capital. Keep the funds held in your current business account to a minimum and make sure you are maximising the interest payable on your deposit account. With many business deposit accounts paying very little interest and significantly better returns available elsewhere you could be missing out.

7. Get a Reality Check

When forecasting your sales levels, make sure you are realistic. Build in factors such as delays in payment – particularly where you are offering credit to customers, who themselves are experiencing their own challenges, and of course those inevitable bad debts.

8. Dismissing Contingency Planning

Every business should budget for a contingency fund. It could help get you out of a scrape, or more importantly provide valuable funds for a new business opportunity.  Think about Disaster Recovery too, what would happen if your IT systems fail, or your premises are burnt down or flood.  The right insurance will pay out but cannot compensate for your time and effort to get back to normal.

9. Being afraid of Financial Reports

It’s easy to be baffled by jargon, but reports such as your profit & loss account, sales forecast and cashflow analysis, should be an essential part of your day to day business, and are not difficult to understand.  Again talk to your accountant, who can get you past the jargon or alternatively take a part time course in Business Studies and Finance, they will all help.

10. Get Advice when you Need it

Never enter unknowingly into a contract – always get advice if you need it first. There’s a lot of general advice available free, and, like us many professionals offer a free initial consultation. If not, good advice often pays for itself. A good rule of thumb is that if you don’t pay for advice expect that advice to be flawed, and someone else’s opinion when they have no vested interest in your success is about as much value as a belly button.

Above just remember that doing nothing is a decision, and often represents a decision to fail as in business as in life in general we are either moving forward or falling backwards, never can we be certain to stay in one place, in other words as a mentor of mine once said, “You are either Green and Growing or Ripe and Ready to Rot”!

Despite various efforts to stimulate the economy, accessing finance is still a major challenge for UK businesses, it has been claimed

According to the latest monthly survey by the British Chambers of Commerce (BCC), a third of businesses found it more difficult to access finance over the last three months. 

When asked the same question back in June, just 20% of companies said that credit was harder to come by. What’s more, the number of businesses reporting that access to finance had improved was just 3% – down from 6% in June.

However, despite this, almost two thirds of the 400 respondents agreed that a weakened demand for their products and services would be the biggest barrier to growth over the next year.

“Our latest survey results show that the biggest issue facing British businesses is still demand for products and services. This means that any economic recovery is still fragile,” said David Frost, director general of the BCC.

The BCC questioned whether stimulus measures – such as the quantitative easing programme that was recently extended to £200bn – were actually succeeding in increasing lending to small businesses.

Frost added: “It is clear that the huge sums that have been injected into the financial system by quantitative easing are still not reaching small and medium-sized businesses in anything like the scale required for business to invest for future success.

“The Pre-Budget Report on December 9 must include measures that encourage companies to invest and improve confidence. Announcing that 2011’s planned increase in National Insurance contributions will be scrapped would be a good start.”

© Crimson Business Ltd. 2009