I'm aware that I have banged on a bit about my views on Government's rhetoric on 'forcing banks to lend' yet the message from media and Government continues to be confused in the extreme. This article in the Telegraph doesn't break any new ground, but it is unusual in one respect, which is that Angela Knight, chief executive of the British Bankers’ Association touched on the hidden topic - that of risk or - to put in in more raw terms, bad debt.
We all love SME business - they are the lifeblood of our economy and are also proving very cuddly to the media - but, let's be absolutely clear, the risk of bad debt in lending to small business is always present - and is significantly increased in economic downturn; there are 2 reasons why banks are failing to lend - and spite isn't one of them. The first reason is that they simply lack the resource to do so, the second and more enduring reason is that they are in absolute dread of bad debt - which can quite easily push them back to illiquidity.
Bad debt from customers is a real problem to business, but a problem that can be mitigated to some extent. To a lending institution it isn't an external or secondary risk, it is at the very core of lending and pricing policy. If you read the legal section of any business forum or journal, you will often find advice being given to business owners on how to avoid paying out on personal guarantees - it is entirely undestandable that people want to keep what they have worked for but- let's be clear - this isn't about bankers' bonuses or profiteering, the effects are passed directly to small businesses in both price and underwriting.
It is impossible to have a coherent discussion about lending without talking about bad debt, so please - we are all big grown-ups here - lets not pretend it doesn't exist or hide it behind the curtain with the elephant - if you are going to talk about bank lending, lets actually admit what the issues are!
Sunday 30 October 2011
Thursday 27 October 2011
CrowdFunding - The power of the crowd!
3 years into the banking crisis, and still the newspapers carry headlines like this one in a recent edition of The Telegraph indicating that - whatever the veracity of lending statistics - it is abundantly clear that relations between banks and business remain less than cordial and will presumably remain so for some time to come.
One potential White Knight riding onto the non-bank funding scene comes in the shape of 'Crowd Funding' where wealthy individuals can get a return on their money by lending it at commercial rates to businesses or private individuals. The lending might take the form of term loans (typically 1 - 3 years) or equity funding.
On loan facilities the investors effectively bid for each proposal thereby setting the sell rate based on its popularity, whereas equity investors are liable for their own due diligence and will reap rewards based on the performance of their specific investment, just as if they had invested on traditional stocks and shares.
I have been watching Crowd Funding closely for almost a year, really to see whether it took root or whether it was just 'another Internet concept'. Pleasingly it seems that some strong players have emerged and that peer-to-peer loans are rapidly becoming acknowledged as a credible alternative to traditional bank lending.
Moreover, some of the founder organisations have come together to create a code of conduct designed to keep rogues out of the market. Of course there will always be the fear that this will restrict competition, a scenario which should be avoided but applied wisely, should avoid borrowers falling victim to less scrupulous operators who always circle the money business.
The symbiotic relationship between banks and their business customers was simultaneously their greatest strength and their greatest weakness; it was very easy for a customer requiring finance. From a glance at a screen the bank could get a thumbnail of turnover, trends and a snapshot of financial health and make a swift judgment. On the downside, if things started to go wrong this could swiftly knock on to all business and possibly personal finance arrangements in many cases leaving the customer with nowhere to turn. The ease with which these arrangements could be made or terminated resulted in the cliche of banks handing out umbrellas in the sunshine only to take them back when it started to rain. With an external lender they have no up-front knowledge so are reliant on the customer supplying good quality, current information - something which was often overlooked in the hedonistic pre-crash era.
By using an external loan provider, banking lines will be left untouched and as long as payments are maintained there will be no interference with trading or security position. It is early days but common sense suggests that it is more economically intelligent to nurse default cases than to tear in with guns blazing.
Overall, I can see Crowd Funding, or Peer-to-Peer lending as a viable and sustainable business tool - it really is banking without the bank; the lender gets a rate of return well in excess of bank deposit rates, and the borrower gets a commercially sensible borrowing rate - truly a win-win situation! So, what are the pitfalls?
I have touched on issues of integrity, which could range from marginal operators who might be under-capitalised to out and out villains, though the industry is typically good at weeding these out.
More concerning is the issue of bad debt - particularly in equity models - extensive due diligence is not financially viable and simple statistics indicate that as many as two thirds of investments will not generate sufficient return to cover investment - whist as many as a third might completely fail. This is clearly an inherent risk of share investment, but if investors complain en-mass they might stir the FSA into paying special attention to the sector and potentially strangling it with regulation. The effects will be less with loan products, but it is not yet clear if investors are really fully aware of its impact, or whether they will simply turn away from the scheme when returns are hit by debts.
Overall, my though is that the sector is doing a pretty good job of regulating itself and is worth researching further if you are looking for business loans or capital or, indeed if you have a spare few bob for a mid-risk investment.
If you want to know more about Crowd Funding, or conventional business finance, call me on 07932 075754
One potential White Knight riding onto the non-bank funding scene comes in the shape of 'Crowd Funding' where wealthy individuals can get a return on their money by lending it at commercial rates to businesses or private individuals. The lending might take the form of term loans (typically 1 - 3 years) or equity funding.
On loan facilities the investors effectively bid for each proposal thereby setting the sell rate based on its popularity, whereas equity investors are liable for their own due diligence and will reap rewards based on the performance of their specific investment, just as if they had invested on traditional stocks and shares.
I have been watching Crowd Funding closely for almost a year, really to see whether it took root or whether it was just 'another Internet concept'. Pleasingly it seems that some strong players have emerged and that peer-to-peer loans are rapidly becoming acknowledged as a credible alternative to traditional bank lending.
Moreover, some of the founder organisations have come together to create a code of conduct designed to keep rogues out of the market. Of course there will always be the fear that this will restrict competition, a scenario which should be avoided but applied wisely, should avoid borrowers falling victim to less scrupulous operators who always circle the money business.
The symbiotic relationship between banks and their business customers was simultaneously their greatest strength and their greatest weakness; it was very easy for a customer requiring finance. From a glance at a screen the bank could get a thumbnail of turnover, trends and a snapshot of financial health and make a swift judgment. On the downside, if things started to go wrong this could swiftly knock on to all business and possibly personal finance arrangements in many cases leaving the customer with nowhere to turn. The ease with which these arrangements could be made or terminated resulted in the cliche of banks handing out umbrellas in the sunshine only to take them back when it started to rain. With an external lender they have no up-front knowledge so are reliant on the customer supplying good quality, current information - something which was often overlooked in the hedonistic pre-crash era.
By using an external loan provider, banking lines will be left untouched and as long as payments are maintained there will be no interference with trading or security position. It is early days but common sense suggests that it is more economically intelligent to nurse default cases than to tear in with guns blazing.
Overall, I can see Crowd Funding, or Peer-to-Peer lending as a viable and sustainable business tool - it really is banking without the bank; the lender gets a rate of return well in excess of bank deposit rates, and the borrower gets a commercially sensible borrowing rate - truly a win-win situation! So, what are the pitfalls?
I have touched on issues of integrity, which could range from marginal operators who might be under-capitalised to out and out villains, though the industry is typically good at weeding these out.
More concerning is the issue of bad debt - particularly in equity models - extensive due diligence is not financially viable and simple statistics indicate that as many as two thirds of investments will not generate sufficient return to cover investment - whist as many as a third might completely fail. This is clearly an inherent risk of share investment, but if investors complain en-mass they might stir the FSA into paying special attention to the sector and potentially strangling it with regulation. The effects will be less with loan products, but it is not yet clear if investors are really fully aware of its impact, or whether they will simply turn away from the scheme when returns are hit by debts.
Overall, my though is that the sector is doing a pretty good job of regulating itself and is worth researching further if you are looking for business loans or capital or, indeed if you have a spare few bob for a mid-risk investment.
If you want to know more about Crowd Funding, or conventional business finance, call me on 07932 075754
Monday 10 October 2011
The bank of Jeremy Kyle?
Whilst our world leaders grappled with the Eurozone crisis, I can safely say that I enjoyed a full and enjoyable weekend. I did, however, take time out to contemplate the parallels between pubs and banks - in particular at the start-up stages.
As any seasoned publican will tell you, when a new and inexperienced licensee comes to town (particularly to a town centre pub), they will inevitably have several waves of customer before - hopefully - finding the clientele they were actually looking for.
The first, and least desirable wave of customers will be those who are banned from every other pub in town - drunks, drug dealers, fighters and generally those people who will drag you to your knees without careful management. With the best will in the world, as a newcomer to town - and to the industry - you might struggle to identify these people. The heavily tattooed bruiser who looks very dodgy could turn out to be your best and nicest customer, whereas the well-spoken chap in a suit might turn out to be the local drug dealer and loan shark. Besides, you have a business to run and cash in the till is better than no cash, surely?
Your second wave will be regulars in other town pubs. Their visit will be mainly inquisitive though they might be swayed if they like what they see. These people often move in groups, so you might well end up becoming the favoured establishment bikers, students, or, indeed train spotters. This of course can have its own advantages and disadvantages.
Finally, you can work on developing your target audience; except that you are unlikely to attract the fine wine and gastro brigade if your bar is like the Green Room at the Jeremy Kyle show.
A seasoned publican will have developed a personal sense for good and bad clientele; whilst not unerring he will be reasonably in control and sufficiently astute to act swiftly with problem customers.
Similarly, a local person will often know who to avoid by face, name and reputation.
And so to banks - or finance companies.
The moment you announce that you have £x million to lend to XYZ customers, a queue will form at your door.
At the head of the queue will be those who have been declined for finance elsewhere. Many will be honest and decent and will come across well, but will still represent a higher than average risk to your business (think of the affable customer, who just always has a bit too much, picks a fight and is sick on the carpet); others will be blatant fraudsters whilst others will just be chancers and nutters.
When that queue has subsided, you will be visited by those who have alternatives but are commercially astute and are interested to see what you can provide. Ultimately you will only get their custom if you have something of value to offer.
Finally, you can establish your market niches and develop relationships and knowledge within your chosen sector from which - if you have not been drowned in bad debt first - you can grow a successful finance business.
George Osborne has yet to reveal any detailed plans for 'credit easing' for small, business, though he has indicated that ultimately he would like to bypass the main banks and has used the term 'Small Business Bank'. My personal instinct is that it won't be a bank in any meaningful sense of the word, but something more akin to a 'pop-up-shop' type of finance company.
The genuine concern is that, in by-passing the banks, this 'Small Business Bank' will be every inch the new publican in town. There is little or no evidence that the people behind the plan have any real comprehension of business, lending, bad debt or, indeed the inevitable fraud that they will be faced with.
Presumably they will bring in some big names and advisors who can provide intelligent input but still won't have been at the coal face for some time. Besides, they will be thwarted by the entirely mixed motivation for this venture.
In the pub / bank analogy, the one big discrepancy is price - low cost finance will attract good quality business, whereas 2 steak and chips for a fiver is unlikely to appeal to fine diners. The more direct link is between pub prices and bank underwriting; set your prices high and you will drive away a portion of the bad clientele; set your underwriting standards high and you will weed out many of your potential bad debtors. The problem here is that you will be directly in competition with the banks (who are still lending to their best customers) and other organisations like Peer-to-Peer lenders and private finance companies. Ultimately, your Business Bank will add very little to what is already available.
Besides, the key here is to help struggling business. You can't sell prime fillet steak at 2 for £5, and you can't lend to sub-prime credits at prime interest rates - bad debt is the cancer of business, and never more so than to a finance company. Good gate-keeping and significant knowledge and experience can keep this under control, even in a sub-prime environment, but naivety and lack of management control will bring the thing toppling down quicker than a house of cards.
So, my message to George Osborne; small business will welcome some relief, but Government has neither the experience nor the commercial acumen to operate a bank - you will swiftly become the Bank of Jeremy Kyle.
You can save the taxpayer a lot of money by using the resource already available - established banks and finance companies. Revisit the EFG - re brand it if you must, but above all, make it workable, transparent and actually a guarantee (as opposed to a carefully wrapped PR exercise) - your easing could then be on the market now, when it is needed, rather than some time next year.
As any seasoned publican will tell you, when a new and inexperienced licensee comes to town (particularly to a town centre pub), they will inevitably have several waves of customer before - hopefully - finding the clientele they were actually looking for.
The first, and least desirable wave of customers will be those who are banned from every other pub in town - drunks, drug dealers, fighters and generally those people who will drag you to your knees without careful management. With the best will in the world, as a newcomer to town - and to the industry - you might struggle to identify these people. The heavily tattooed bruiser who looks very dodgy could turn out to be your best and nicest customer, whereas the well-spoken chap in a suit might turn out to be the local drug dealer and loan shark. Besides, you have a business to run and cash in the till is better than no cash, surely?
Your second wave will be regulars in other town pubs. Their visit will be mainly inquisitive though they might be swayed if they like what they see. These people often move in groups, so you might well end up becoming the favoured establishment bikers, students, or, indeed train spotters. This of course can have its own advantages and disadvantages.
Finally, you can work on developing your target audience; except that you are unlikely to attract the fine wine and gastro brigade if your bar is like the Green Room at the Jeremy Kyle show.
A seasoned publican will have developed a personal sense for good and bad clientele; whilst not unerring he will be reasonably in control and sufficiently astute to act swiftly with problem customers.
Similarly, a local person will often know who to avoid by face, name and reputation.
And so to banks - or finance companies.
The moment you announce that you have £x million to lend to XYZ customers, a queue will form at your door.
At the head of the queue will be those who have been declined for finance elsewhere. Many will be honest and decent and will come across well, but will still represent a higher than average risk to your business (think of the affable customer, who just always has a bit too much, picks a fight and is sick on the carpet); others will be blatant fraudsters whilst others will just be chancers and nutters.
When that queue has subsided, you will be visited by those who have alternatives but are commercially astute and are interested to see what you can provide. Ultimately you will only get their custom if you have something of value to offer.
Finally, you can establish your market niches and develop relationships and knowledge within your chosen sector from which - if you have not been drowned in bad debt first - you can grow a successful finance business.
George Osborne has yet to reveal any detailed plans for 'credit easing' for small, business, though he has indicated that ultimately he would like to bypass the main banks and has used the term 'Small Business Bank'. My personal instinct is that it won't be a bank in any meaningful sense of the word, but something more akin to a 'pop-up-shop' type of finance company.
The genuine concern is that, in by-passing the banks, this 'Small Business Bank' will be every inch the new publican in town. There is little or no evidence that the people behind the plan have any real comprehension of business, lending, bad debt or, indeed the inevitable fraud that they will be faced with.
Presumably they will bring in some big names and advisors who can provide intelligent input but still won't have been at the coal face for some time. Besides, they will be thwarted by the entirely mixed motivation for this venture.
In the pub / bank analogy, the one big discrepancy is price - low cost finance will attract good quality business, whereas 2 steak and chips for a fiver is unlikely to appeal to fine diners. The more direct link is between pub prices and bank underwriting; set your prices high and you will drive away a portion of the bad clientele; set your underwriting standards high and you will weed out many of your potential bad debtors. The problem here is that you will be directly in competition with the banks (who are still lending to their best customers) and other organisations like Peer-to-Peer lenders and private finance companies. Ultimately, your Business Bank will add very little to what is already available.
Besides, the key here is to help struggling business. You can't sell prime fillet steak at 2 for £5, and you can't lend to sub-prime credits at prime interest rates - bad debt is the cancer of business, and never more so than to a finance company. Good gate-keeping and significant knowledge and experience can keep this under control, even in a sub-prime environment, but naivety and lack of management control will bring the thing toppling down quicker than a house of cards.
So, my message to George Osborne; small business will welcome some relief, but Government has neither the experience nor the commercial acumen to operate a bank - you will swiftly become the Bank of Jeremy Kyle.
You can save the taxpayer a lot of money by using the resource already available - established banks and finance companies. Revisit the EFG - re brand it if you must, but above all, make it workable, transparent and actually a guarantee (as opposed to a carefully wrapped PR exercise) - your easing could then be on the market now, when it is needed, rather than some time next year.
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