Corporate Finance Associates Blog

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.