Corporate Finance Associates Blog

As the UK funding market eases a little more and more businesses who have been biding their time for the last three years are making their funding plans for the future, but wow,  has the market changed or what and the biggest retort we have been hearing over the last few weeks has been – Why so many questions?

Prior to all of the credit crunch challenges kicking off way back in late 2007, we as reputable brokers had a lot of commercial broker wannabes ‘Eating our Lunch’ what with the tick here “just say you can afford it”, “we don’t need accounts with this lender”, “the property prices will go up so no one is really bothered…” market place.  Where have they all gone? – Either out of business or back to their old haunts thankfully and the regime of the specialist business finance broker has returned.

Our clients however still have that old way of thinking and can’t understand why lenders want so much information to support a lending proposition, maybe the drop (from the June 2007 peak) in commercial values by 33% could be part of it, maybe it is the underlying attitude of bankers who are sometimes seen as not wanting to lend, or a raft of other factors.  So I thought I would create this Blog post as some answers and clarification of the current situation.

First off – the old ways are dead and not likely to be revived for an awfully long time.

What do lenders look at, well three distinct areas:

1. Who is the borrower, what is their experience, what is their credit history like, do they have the skills to make this project work

 

2. How will they get repaid, it will either be from the trading income from the business, the sale value if it is a development or the rental income in the case of the investments, and

 

3. What is the security worth, how easily could it be let/sold, or how could the lender get out of it if things ever go wrong.

 

Before late 2007 if no. 3 was attractive enough lenders would lend which is why we saw the proliferation of self certification lenders, where are they now – all gone – there is not one reputable one of them left that operates that way.  The current thinking – if you can’t satisfy no. 2 the case will go nowhere.

Ah yes but what do lenders want here? – They want certainty which was never a given anyway, their way around it now, well they look for stress rate testing (NatWest are stress testing with a base rate of 6% – when was the last time it averaged that?) and this makes a lot of ‘normal’ transactions fall over.

But what if they are happy with that, why all the other questions and information? Perhaps we can look at those:-

CV’s      

They need to know the applicants background and skills that relate to the proposition

Asset & Liability statement         

They need to know what assets you have and how exposed you are to third party lending so everything has to be included

Income & Expenditure statement

If you are living beyond your means (or not actually declaring all of your income) the numbers here won’t add up, and a credit search will quickly reveal whether these numbers are right

Three months personal bank statements (sometimes 6 mths)

How do you manage your personal money, do you keep within agreed facilities, is all your income showing, who are you paying money out to – if you have a credit card payment to a lender that wasn’t recorded on your A&L statement expect questions – do the bank bounce anything – all these and more can be revealed in consecutively numbered (original) bank statements.

Three or six months business bank statements

Much the same as the personal assessment – can you manage your money and does it all show

Three years trading accounts

The big one! – can you pay the lender back based on past history, are the accounts improving or static, how exposed is the business to external lending, what are you paying yourself, and what ISN’T showing and of course how historic these figures are ( if they are over a year out of date expect more questions)!

Whilst this list isn’t exhaustive, trading companies are often asked to provide aged debtor and creditor lists to show how fast you pay your bills and how skilled you are at getting your invoices paid on time – none of this was absolutely necessary with a lot of non conforming lenders in 2007, but it has come as a shock to many that they need them now.

The banks are claiming that they are still lending to viable businesses, but of course that is their assessment of a viable business, how are they ensuring that they don’t lose out?  Well firstly reducing the amount in LTV terms they will lend, by shortening the loans so they amortise faster, by refusing to accept interest only propositions unless the LTV is very low and at the same time charging interest margins and fees twice the level they used to – why because they can.

If your business is now at the stage where you need to be thinking about moving forward, give us a call and we can at least point you in the right direction as to what is possible, why not get in touch by clicking here now.

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.

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.