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.

Looking for business funding or just testing? (is your business investment ready?)

Precis of a telephone conversation yesterday:

Customer: I'm looking for £50,000 to finance scaffolding, but no-one will do scaffolding at the moment.

Me: Yes, scaffolding is tricky, there are lenders out there who will do it, but they need to be comfortable that the credit is good.

Customer: So you can do it?

Me: Yes, if the underlying information is strong enough.

Customer: So what do you need to see?

Me: I need [list of underwriting requirements for unsecured lend]

Customer: What do you need all that for?

Me: [explain underwriting process]

Customer (clearly frustrated): So If I get that information you can do the deal?

Me: If it all stacks up, yes..

And so the conversation continued to circle around the actual provision of hard facts, with a slightly uncomfortable reliance on promises and assertions.

On the back of this - far from unusual - scenario, I did a thumbnail analysis, and concluded that 70% of enquiries fail to result in information being supplied. I spoke with a good friend in the factoring industry who opined that, in his case the figure was closer to 90%, so it is by no means isolated to lease broking.

Put into context, this is almost entirely information that most business owners or FDs should have at their finger-tips; we aren't asking them to prepare business plans nor, in most cases, projections.

We can only guess at reasons, but with many years' experience I would put this down to one of 2 factors:

The information is bad, so they don't want to provide it:  Fully understandable (interestingly pre-crunch we had many customers who would cheerfully send the most appalling information then act surprised when it was questioned) but I am always at pains to stress that underwriters do understand recession,and that they don't necessarily expect positive trends, nor even  profit - they are looking to understand where the business is now and where it is going to.

The customer isn't fully engaged, but is just testing the water: In my opinion, the more likely in most cases. As a broker I rely on long-standing contacts - in some cases contacts of 20-years plus. I am very happy to test the water and have general discussion on the assumption that we will talk again when a real need arises - feel free to tell me you are just exploring and we can have an open chat!

This brings to mind the recurring stories about how businesses are afraid to apply to their banks for funding for fear of losing their existing facilities. Really? Your business is thriving and moving forward, but you are frightened of losing your facilities?

So, what is the point here? well, fundamentally it is about having some clear goals and definitions; by all means test the water, but you cannot judge any situation by a response based on insufficient or indeed, misleading information.

Most important, if you actually are looking for business funding, then you must be prepared to back up your application with solid, current and coherent information. Obviously what will be read into that information will depend what you are looking for - if it is a refinance proposition there will be some assumption that business is tough, whereas if you are looking to open new branches, we will need to see that your current business is working.

VCs and equity funders have long used the term investment ready - perhaps a similar criteria should now be applied to applications for finance 'Why will a financier want to invest in you?'.

I've been in the game a long time, give me the facts and I will provide honest feedback

Is Venture Capital the right source of funding for your business?

Despite being one of the most difficult sources of business funding to secure, many SMEs see venture capitalism as an attractive funding option. There are hundreds of VCs in the UK with money to invest and a successful pitch could see your business provided with millions of pounds in financing, the counsel of highly successful business people, access to a huge network of established contacts and even the possibility of increased media exposure. However, despite the many advantages evident, the fact remains that the criteria set out by venture capitalist firms, and the commitments resulting from a successful funding round, are often very specific and not suited to a lot of small businesses.

There are a variety of factors that could influence the suitability of Venture Capital for your business:

Very high returns:       It is not uncommon for VCs to expect a return of 5 to 10 times their initial investment. The majority of small businesses cannot provide the potential for growth to generate such returns.

Short exit periods:       The desired exit period for a lot of VCs can be in the range of 3 to 5 years. If this is in line with your goals then no problem, but if you are considering long-term investment then venture capital may not be for you.

Large cash injection:   This is good for helping the small proportion of companies for whom a cash injection of £3-30 million will materially increase their growth rate and chances of success. If this is not the case for your business, is it worth the high level of dilution that such a large equity investment will incur?

Large proportion of control:   Often, a prerequisite for a VCs investment is a high level of control within the investee company and therefore a major influence in the decision making process. This requires a lower level of independence for an entrepreneur in areas such as the direction of the business, business strategy, management decisions etc.  If you want to be an individual and retain a large proportion of control in your company, VC funding is probably not a suitable option.

Time consuming process: Obtaining equity investment can be time-consuming, with deals typically taking 6 months or more to arrange. So if you require a quick cash injection into your business, VC may not be the best funding option for you.

It may be that venture capital is not a suitable funding option for your business. However, this should not be cause for concern as there are a wealth of other business funding sources available in the form of grants, loans, angel investors or crowd funding to name a few. 

This guest post was kindly provided by Business Funding

Author  Joe Corringan.

Do you need business finance? Really?

Rather a strange question for a finance broker to be asking, isn't it; but this topic frequently comes up on the lender side of the business fence and will actually, in many cases, form part of the business argument for (or against) lending.

The question broadly speaking has 2 key components:

Firstly, is it possible to utilise your existing resources to better effect? The prime example of this is customers who come looking for cashflow facilities (debtor finance or bridging overdrafts). In many cases the best avenue is conduct a careful review of both debtor and creditor terms - set a simple goal - to see if you can improve your cash position by 10% by adjusting and managing your debtors and creditors.

Sorry, but I will definitely upset a few people here  - however good you feel your credit control is, it is almost certainly not as good as you think. That is a simple, statistical fact. Most people resent bringing in 'specialists' to do what they feel they can do themselves, but will then go on to pay arrangement fees, management fees and charges to a factoring company to bridge the cashflow hole. An external review of your terms, systems and effectiveness can add a lot of cash (your cash!) to your business - and that is for ever - not just to bridge the gap!

So, if you want invoice/debtor finance I would be delighted to chat, but for your own sake, first of all ask yourself if you are really doing all you can to bring in money yourself.

The second component could be called aspiration (or perhaps expecting too much); and much of the blame can be put on the doorsteps of 'TV entrepreneurs' and motivational literature constantly urging us to 'think big', 'live the dream' and so forth; thus wannabe entrepreneurs approach funders with what amounts to a plan requesting finance for a fully-functioning business. (The good news is that it is always 'cast-iron' or 'fail-proof').

In one extreme - but entirely true - example, we were approached by a young person wanting to set up a retail based IT business - the plan included staff, vehicles, stock, marketing and - yes - freehold premises. What was he bringing to the venture? A degree in IT. This particular person did actually go on to complain that banks wouldn't help small businesses, even after I pointed out that even in the days of lending hedonism he wouldn't have had a chance!

An extreme case, but not wholly unrepresentative of many people's aspirations. The banks got very, very silly with lending and in the process created very strange expectations; the commercial reality now is that you need to build a business from scratch not to start at a jog or least of all to walk into a fully-functional, externally funded enterprise.

Having aspirations built into your plan is probably a good thing, but day one expectations must be realistic.

So, before you waste lots of time doing big business plans and presenting them to banks or funders, ask yourself 'can I get going without the money' - an up and running business is always an easier proposition than a pre-start.

Specialist Funding products - Trade finance

Following on from my tongue-in-cheek review of business funding products, my aim now is to flesh out some of the less understood products; in this case Trade Finance.

If you ask most accountants, bank managers or business advisors about trade finance, in 80% of cases you will be met with one of 2 responses: either a blank look, or something along the lines of 'Oh yes, thats for stocks and things' - test me on that one!

So to dispel the myth (and alienate half of my readers): Trade finance is not stock finance. Stock finance per se does not exist (but if it did, I'd be very, very wealthy - at least for a short time).

Having established what it isn't - what is it? and who can use it?

Trade Finance is a specialised funding product which is probably appropriate for about 10% of businesses in the UK - and for those companies it really can be the difference between run away success and limping along from day to day.

The vital components to create a trade finance deal are:

1. Finished goods (or simple process required to finish)
2  Confirmed order or clear route to sale.
3. Credit insurance on one of the key parties.

So in the most simplistic of scenarios  XYZ inports supplies SpaceHoppers to a varietly of local stores. They are sourced in China & shipped direct at a gross margin of 30%

They are approached by a major multiple who wants SpaceHoppers supplied in bulk, potentially trebbling their turnover. XYZ approach their bank for an overdraft to fund this transaction for 60 days; unsurprisingly the bank decline as there is no tangible security in the UK.

 Enter Trade Finance. The trade financier effectively takes on the transaction on XYZ's behalf buying SpaceHoppers and delivering for a fixed fee.

Result:

The customer fulfills his order and is now established as a regular supplier to that multiple (and a valued customer of the Chinese manufacturer)

The multiple has their stock in good time and on standard terms.

The bank have a secure customer without having taken any risk (The trade financier is independent so the banking relationship remains intact).

That is, of course, a perfect world scenario, there are often a lot of twists and turns and varients on how the product is offered.

Traditionally, this is an area where banks would have taken a punt on overdraft funding (often dressed up as trade finance), but that is now extremely unlikely - in fact it would probably be an instant-dismissal offence for most managers to take on this type of facility.

In a nutshell, trade finance is about getting the deal done; in the example cited, the customer had a clear choice - do the deal with trade finance or lose the customer.

Those who can use it really need to be aware of this product.

EFG Loans - Who has been conned?

Back in January 2009, the (then) Government announced, to great fanfare, the EFG - Enterprise Finance Guarantee - loan facility.

In a nutshell, the Government would provide a 75% guarantee on loans to those businesses who were struggling to raise finance for cashflow or growth.

Like most Government initiatives, the underlying intention was good, but by the time it came to fruition it was mired in so much red tape and so many caveats as to render it effectively unfit for purpose.

A liberal thinker might suggest that the Government are just too distant from business to really understand - whereas a true cynic would say that it was just another attempt to appear to be doing something good whilst passing the responsibility elsewhere - in this case back to the banks.

To look at some highlights

The scheme is aimed at successful businesses which are experiencing difficulty in raising finance. This is the eternal lending conundrum; in every single proposal we see, the business is doing well, but just need a few months to... (it has been said that in every liquidation the directors still believe that they only needed 3 months to sort things out). Of course, many of them will survive, but equally many won't. Sadly, both banks and Government have shown themselves to be fairly inept when making these judgements.

The original scheme was for £600 Million - now extended to £2 billion.  This means that we are asking our failed banks to commit to £1/2 billion of debt they are not entirely comfortable with. Shortly after they have lost billions by imprudent lending..


Banks are allowed to take security, but not over the family home: In lending circles, it is implicit when seeking additional security that you are not entirely comfortable with the primary debt. In reality due to the numerous caveats on the scheme most banks are seeking 100% security whilst using the guarantee as a fall-back.

So far, so good, what exists is basically a very confused view of what constitutes good credit and security - hardly surprising when you consider that no one in Government (any party) has any involvement in business.

However - there is a sting in the tail.

Paperwork: Who has had to fill in Government forms? All of us. Who has had forms returned due to insignificant input errors? Many of us. Who has gone on to be fined for late filing after forms have been returned? A few of us.
Just because this scheme is dressed as a collaboration between Government & banks doesn't exempt it from the confetti factory that is Government paperwork. It is reported that Barclays lost millions under the previous SFLG scheme (which the EFG replaced) due to paperwork inaccuracies. OK, the banks should get it right, but the Government should also honour the spirit rather than the letter of the agreement. (They are not exactly immune from errors themselves).

Bad debt: The very crux of the matter! successful lending isn't about putting money out of the door, it is about recovering it. We have established that there is a lack of clarity in this framework over what constitutes good credit. To protect you, the tax payer, the Government have set a ceiling on what they will repay under the scheme - this is set at 13% of the total loan portfolio (in other words 9.75% of the guarantee amount). To put this in perspective, there were reports of bad debt running as high as 60% under the SFLG scheme which would have put huge debts back on the bank.

The dual rationale for this is:

1. To make sure that the banks lend responsibly.
2. To protect the taxpayer.

All well and good, but various ministers are still banging on about 'forcing banks to lend', which doesn't sit neatly with a prudent policy. It's nice to protect the taxpayer, but it's not really a guarantee, is it?

Just once, wouldn't it be nice if our Government actually did what they promised rather than hiding behind paperwork and rhetoric?

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!