Umbrellas in the sunshine

Do you remember in the not so distant past when raising money for your business was relatively straight forward? You called your bank manager and he/she visited you. You presented them with accounts and projections and they granted you a loan or overdraft on a sort of sliding scale:

·         If they were very confident they would grant a facility on the figures provided.

·         If they were cautiously confident they would take a charge on business assets.

·         If they were a bit concerned they would take personal guarantees

·         If they were worried, they would take a second charge on your home.

In most cases the business owner would trundle along to their lawyer comfortable in the knowledge that the promised loan would repay the mortgage several times, plus their house was appreciating in value so - at worst - they would still have equity with which to repay

Then, way back in 2008, the bank realised they had got it wrong. Oh, so very wrong.

At almost every level.

Mostly, the good stuff was good; but the charges on assets were undermined by a small but crucial Court ruling which excluded book debts (pick me up on this, it’s just an overview).

When it came to taking charges on family homes, they were undermined by several factors:

1.       They had ignored the fundamental economic reality that property is a commodity, and values can go down as well as up.

2.       When push comes to shove, people won’t give up their home without a fight.

3.       That wholesale repossession would wreck their balance sheet and

4.       They could never have foreseen that they would become effectively State-owned, and their new owners would never countenance the removal of families (not living considerably above their requirements) from the family home.

This, of course, is exceptionally good news for those business-owners in considerable difficulty facing potential bankruptcy and possible eviction.

Unfortunately it is very bad news for those who have spent decades paying down a mortgage and now, in need of reprieve, are faced with a straight decline for borrowing facilities.

What this means is that the canny business owner, who has kept an overdraft in reserve for the proverbial rainy day, having reached that rainy day, hasn’t just seen the facility withdrawn for lack of utilisation, he can’t renew it even though he is offering the ultimate security. To go back in time, this is the old analogy of banking – that they will freely hand out umbrellas when the sun is shining, but take them away when it start to rain.

So, is there good news? Well, in a limited way.

Firstly, there are, of course more relevant ways of borrowing money than bank loan or overdraft such as hp/leasing, sale and lease-back, factoring, trade finance, crowd-funding, equity investment  etc. secondly. There are lenders who will still lend on a second charge but – be warned – they will not be as slack as the banks and will look seriously at the proposal! and will expect to enforce their security if things go pear-shaped.

It’s not all bleak, but it is important to keep realistic expectations!