Steve Leverton's Business Blog

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Ten traumatic steps to trouble in the Game of Loans

iron bank credit

I’m involved in another case supporting a client where their bank, sometime ago, suggested that they might like to look for another lender. Matters are now urgent and the client’s properties are now at serious risk.

It would be easy to dismiss this as a case of someone being a bad risk who has upset their bank and is perhaps deserving. Why would a bank behave like this?

Well the answer is that it can happen rather easily. As in so many cases that I’ve dealt with (successfully) the client is a high net worth customer of a Private Bank, and with a longstanding relationship.

Private Banks did have a habit in the past of lending money at fine rates on propositions that were a bit ‘bespoke’ – great at the time but in these days of regulation and capital weightings, such loans are expensive for them to keep on the books and cause them regulatory problems.

The trigger can also be a decision by the bank to change their ‘wealth’ or ‘income’ criteria for who they want banking with them.

It’s ruthless but its business – they kindly suggest to the client that they should start to look for another banker.

What happens next can be a ten-step path to serious problems – it goes like this:

  1. Private bankers tend to be decent people, the message might not be quite so assertive in the first step and the client will always ‘hear what they want to hear’. The message doesn’t quite hit home that they should really start doing something about this.
  1. This is followed by ‘denial’- ‘I’ve banked with them for years, surely they don’t mean it, surely they’ll change their mind or it’s just the new bank manager being awkward’ Nothing gets done.
  1. Deferring tactics follow – the client has a good deal. It will take time to rearrange it with another lender and cost money (arrangement fees and valuation fees alone will cost thousands of pounds) and it is possible that an alternative loan package might not even be available. The longer the client can delay the longer they can benefit from that low interest deal, often involving million pound loans (who wouldn’t hold out?)
  1. Stop talking to the bank – more pressure from the banker makes the client less inclined to communicate (although this proves to be like the child that puts on a blindfold and thinks this makes them invisible.)
  1. Meanwhile the bank is following a dogmatic well set out process. Step by step they will be moving down a path which could, in theory, ultimately lead to foreclosure and repossession/forced sale. The account is likely to be moved to a different manager who doesn’t have a relationship with the client and will be more objective about getting ‘the banks way’. The relationship becomes confrontational.
  1. At some point the client will realise it would actually make sense to talk to another bank. They may not already have a contact (many private banking clients have only dealt with one bank) and will find it hard to find the best person to talk to. They might at this point talk to their professional advisers (typically their accountant) for ideas or be introduced to a broker for help. One thing is certain; they will underestimate how difficult the task will be and how long it is going to take.
  1. Pride, anger, memory lapse or denial will lead to them not sharing the full story with the new bank or the broker who is trying to help them. As a result the urgency might not be appreciated. A refinance is normally possible for such clients (all banks understand that other banks act like this) however time is of the essence – the process could easily take 3 or 4 months to complete.
  1. The client gets ‘uglier’ to a new lender by the day. As the existing bank exerts pressure by increasing interest rates or returning cheques the clients’ accounts show signs of stress and their credit rating can easily be affected. It becomes harder to set up a loan with a new bank.
  1. The issue becomes urgent. The costs go up. The banks offering the best terms tend also to be the banks that are most pedantic in their processing and they will not compromise on their underwriting. They may reject a loan applicant just because their situation is deteriorating through the underwriting process. It then becomes necessary to find a lender who will act quickly or compromise on quality – they charge higher interest rates and fees to reflect the risk.
  1. There becomes a real risk of foreclosure if the client doesn’t get to ‘Point 6’ quick enough. A client with plenty of assets and income, a good reputation and banking history can find themselves in an expensive battle just because they didn’t react quick enough.

Do you have a client who might be at Stages 1 to 5? Could it be you?

My approach now is not just to find a new bank but to ‘project manage’ the whole process of moving from one to the other in a timely manner and minimising costs. Bankers themselves like the approach and clients are appreciative – but typically only after the event.

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Are SME ‘Boards’ more likely to spot a wrong comma than a decimal point?

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There is a tendency for SME ‘Boards’, or informal support networks for an entrepreneur, NOT to evolve and grow as the business grows.

This is understandable; trusted advisers who have supported a business in the formative years know the business and are, as their name suggests, trusted by the executive (usually the founder).

However the demands of a growing business sometimes need a fresh pair of eyes or additional resource or skills. Typically that often involves bringing in more financial expertise, especially where external investors have to be kept satisfied.

Often a Board or an executive team can place too much reliance on one person knowing the finances and they pay cursory attention to the figures themselves.

I’ve recently insisted that the members of a Board go through a short ‘training session’ on the particular finances of the business involved, because I could sense that they were taking too much comfort from my involvement and THEY have responsibilities too.

I have painful memories of a case where a business set out to grow their business dramatically with the opportunity of a major new contract.

Establishing the cashflow funding needs were out of the comfort zone of the CEO (although he claimed that the issue was that he was too busy) so he employed what was a ‘Top Tier’ Accountancy firm to compile the business plan.

It was a relatively small job, so it was given to a newly qualified accountant who made some significant mistakes in the projections (which were not spotted through sign-off).

The business plan went to a bank who had confidence in the CEO and knew that a top firm had done the numbers. The errors were not picked up (although with hindsight they were obvious) and the requested funding was agreed.

The Board saw an impressively thick plan, with lots of numbers, prepared by a top firm, which had met the approval of the bank as well as the CEO. They approved the plan – after some changes to the narrative (hence the comment about the misplaced comma!) – and everything went ahead.

A year later the business had to be rescued after it ran out of money.

Could this happen to a business that you know?

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An alternative for property developers needing finance

propOrganising funding for property development involves challenges. Loans are available but from a plethora of different types of lenders with different criteria, all taking the opportunity to fill the gap left by the High Street banks who remain very cautious about this sector.

Those developers operating on a scale to justify having a full-time FD can deal with this challenge (Loan Origination is normally part of their job) but many mid-sized or smaller builders cannot justify this cost and find it harder to find funding as a result.

This is one reason why many developers use commercial finance brokers – the obvious solution where a knowledge of the market is essential. However developers often criticise the broker model because:

  • The developer still has work to do to present the case to the broker. The broker will act as the interface with the lenders, but not always reduce the initial workload.
  • As lenders get further into sanctioning a case their need for detailed information places more demands on the developer, who is trying to deal with other issues at this stage of a project.
  • The developer also has to educate the broker. All developers work differently with different styles and approaches to managing projects and people. Those ‘ethics’ need to be conveyed to a lender for the best financial partnership, but they take time for a broker to assimilate (it is why brokers are more effective for clients when they work for them on a repeat basis).
  • Depending on the broker used and how they operate, their ‘success fee’ model can look disproportionate to the work they have put in. Developer’s financial success depend upon keeping tight control on all costs and being confident they are getting value from all professionals involved at this stage.

‘Cornmill Associates’ offer an alternative to both models. Steve Leverton is a specialist broker for property development within ‘Stirling Partners Finance’ but can also act as an interim or part-time loan originator within the business.

With experience of working with developers and lenders at all stages of a project, and preparing financial appraisals and comprehensive presentations, we can provide an offering which:

  • Enables a developer to establish a close relationship with a professional who can get to really understand the business (to the extent that a broker couldn’t normally justify) and be their ‘Loan Originator’ as and when they need them.
  • Reduces the amount of work in pulling together project information, particularly financials.
  • Gets presentation work done in a way that makes the funding case look more compelling to a lender (who will have plenty of other schemes on their desk to consider).
  • Creates a ‘pay as I need you’ option for the costs, using in-house ‘interim’ rates rather than the brokers commission model.

For more details please email: steveleverton@cornmillassociates.co.uk or call 07814 619207

 

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Why does the Tax Year end on 5th April? – here’s the explanation (it’s intriguing)

A client once asked me how it is that the tax year ends on such an odd date. It just so happens that I knew the answer and it is interesting enough to share. But it is a long story, here goes:

Once upon a time our calendar year started during March. This ‘Roman’ year started at the Vernal Equinox: the day in Spring when darkness and light are of equal length. However the Lunar calendar (on which this was based) is not the same length as the Solar Calendar so the calendar needed regular adjusting.

caesarWith wars and civil disturbances these adjustments didn’t get made for a few years, so much so that when Julius Caesar returned home to Rome in 46BC the diary was two months out of kilter! To adjust this he did two things: he introduced two ‘leap months’ that year, catching up 7 days, and he switched to the Solar calendar, which lasted 365 days. He then only had to add one leap year of an extra day every four years, to keep the calendar in alignment (which we still do of course).

He also did something radical: he decreed that the next year should start on 1 January (instead of during March). In case you wondered, that is why the months of Sept, Oct, Nov & Dec are no longer the months after which they were named (the seventh and eighth month etc). To honour him they renamed the fifth month (then Quintilius) as Julias, and we now know it as July.

However 700 years later the Christians made a change, they wanted New Year’s day to be the 25th December, the anniversary of Christ’s birth. That lasted a few hundred years until some religious dissidents decided the New Year should be 25th March – the presumed anniversary of Christ’s conception.

However Caesars calculations had also proved slightly wrong and in 1582 the Pope decided that 10 days should be omitted from the calendar and the 5th October became the 15th October and he also switched the New Year back to 1 January!

greg calMost of Europe fell into line with this ‘Gregorian’ Calendar except Britain, as the Protestant Elizabeth insisted on sticking to the Julian Calendar. Alignment came however in 1752 – which meant that 1751 comprised of only 282 days. Another adjustment was necessary in September when 2nd September had to be followed by 14th September.

On this occasion simple folk thought that 11 days has been ‘stolen’ from them, leading to ‘give us back our 11 days’ riots which had many fatalities.

Educated people however were more worried about the fact that they had 11 days less to earn money to pay the full year of tax that the Government would still claim.

As ever it was the bankers that had the clout – they organised a tax strike and argued that they should be allowed a one-off extra 11 days to pay their tax, moving the tax year-end to 5th April.

Most European countries use the Calendar year to collect their tax. However since 1752 we’ve used the 5th April – and now you know why!

And you thought changing the clocks was disruptive. How would it be if the current Chancellor saw an opportunity for an adjustment to swell the coffers? How would you feel about losing two weeks instead of an hours sleep?

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