Lending - is it getting through?
As the dreaded ‘credit crunch’ catch-line suggests, one of the defining issues of the last year for many businesses has been access to finance. Lancashire Business View therefore brought together leading figures from the banking, finance and legal professions at Marsden Rawsthorn’s offices in Fulwood, Preston, to discuss whether or not lending was getting through to those who needed it most.
|PRESENT: Ben Briggs (Lancashire Business View), Stephen Hodgson (Marsden Rawsthorn), Peter Hine (Marsden Rawsthorn), Mark Conboy (Tenon), Gaynor Dykes (Business Link), John Stokes (McDade Roberts), Andrew White (HSBC), Les Nutter (Cassons), Edward Spencer (Yorkshire Bank), Martin Newsholme (KPMG), Dave Shaw (Eternitas)|
Are the banks lending and what is the situation like for borrowers trying to get finance?
Martin Newsholme: My view is that it has stabilised quite a bit in the last six months. I think if you went back to Christmas and before there was a sense of panic among the banks, particularly where the relationship managers seemed to be significantly disenfranchised and there was a bit of a sense of panic and that impacted on customers. I think post-Christmas that seems to have stabilised quite a bit. I think there is greater clarity from what I see with the relationship managers as to what powers they have and still in most of the banks a significant need to refer to a higher body and that's changed significantly. I still think it's very difficult for businesses, particularly in certain sectors, to get the funding they need and interestingly I still think for individuals the mortgage market is very difficult.
Mark Conboy: The observation is absolutely right as far as the mainstream banks are concerned and I think part of the issue we have to address is the fact that the type of funding that most companies have access to has changed over recent years. A conventional company which is financed by a bank overdraft or a bank loan has changed dramatically, particularly over the last four to five years with the introduction of invoice discounts, which is a much bigger influence on an awful lot of companies and that's where we're seeing more significant change. Perhaps the typical trading business with invoiced finance has been protected to a degree, but external influences are now coming in which will actually restrict companies' cash flow.
Peter Hine: It seems to me that the banks’ lending is down by £14.7billion, which is actually the worst record for a long time. In certain sectors you just can't borrow.
Which sectors are struggling to secure funding?
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Mark Conboy: We're finding that the property sector has actually gone through all the turbulence right at the start and it became black and white, so therefore it was either "yes we can" or "no we can't” lend. Following on from that the manufacturing industry and commercial businesses, they're the ones that will now suffer and these were the ones which haven’t got conventional overdrafts. Overdrafts are very much a thing of the past.
Andrew White: We advanced £462million of new overdrafts to customers that did not have an overdraft with us on December 31 last year. When you're looking at overdraft utilisation, businesses are still only utilising around 50 per cent of their overdrafts and if you take that back twelve months it was 48 per cent. So, while there's a question of "are banks lending?" there’s also an issue of whether businesses have the appetite to borrow in a recession. It's as much being demand driven as it is supply driven.
Gaynor Dykes: We constantly see the message coming from banks of “yes, we're there to lend but we're not seeing demand, we're not seeing the enquiries coming in from the customers.” And I think that's perhaps an issue of confidence on both levels. Confidence from the businesses that they can approach the bank without the fear of having the rug pulled from under their feet, but also confidence in the banks that there is a viable business is there and that you can support it.
Andrew White: I think different businesses have different requirements and you wouldn't, for example, particularly want to provide a restaurant business with an overdraft facility because it's not the right business model. But the trading businesses, importers and exporters, have overdrafts because people have working capital requirements.
Mark Conboy: From my experience we are seeing propositions turned down. The banks are saying that they don't see propositions going across their desks and yet everybody that I talk to down in management, who all deal with the banks, actually can’t cope with the demand that they are getting from people. We put the propositions down to banks and those banks are taking a week or two weeks longer to look at it simply because they are inundated with requests for finance.
Stephen Hodgson: And presumably on the proposition involving property that's certainly different now. You would only be interested if the loan to bargain with is considerably less than it would have been a year ago if you were lending on property?
Andrew White: Certainly, property is a very different sector to what it was 18-months, two-years-ago, but that's only natural given what's happened to the property market generally. You've seen a serious deterioration in capital values, so naturally there are concerns about these sectors. Going back to businesses in Lancashire, which are primarily trading businesses, there is a healthy appetite for banks to be lending to those kinds of businesses. The issue is one of demand not necessarily supply.
John Stokes: One of the biggest sources of funding at the moment is the Inland Revenue being very, very generous in allocating large dollops of money by non-payment of tax, pay as you earn, VAT at the moment. So while it's not indicative of a distressed situation people are taking advantage of the Inland Revenue at the moment and their fairly generous attitude towards lending money through non-payment of taxes and so on.
Is it the case that the banks are taking longer over the application process than before?
Andrew White: Naturally, anybody looking into lending propositions in this environment is going to want to understand the viability of a business and the affordability in lending practice in detail. If the businesses are helpful to the bank it may make the application process go quicker. Traditionally, having a set of accounts that was 18 months old might have been sufficient to get a feel of where the business was going, but we all know that the world stopped last year, so having some meaningful up to date accurate information will be critical for a successful lending application. Having some projections and giving us something about why you feel those projections are realistic is going to be helpful to the lending proposition. I don't necessarily see banks taking longer, but I do think businesses could be helpful in the preparation.
Les Nutter: I think it's taking longer because the banks are looking for guarantees and they're looking for the directors or the shareholders to actually dip into their pockets and put money in themselves. Generally, what's coming through to me and my partners is that everything seems to be dragging on for longer than it should do.
Gaynor Dykes: The world has changed and firms need to be more prepared, informed and have as much information as possible. It goes back to that confidence that you know they've thought of all the different scenarios, planned ahead and got a medium term strategy. When you’re approaching it completely unprepared, this question is going backwards and forwards and it can take an awful long time.
Edward Spencer: We've just emerged from this situation where some of Britain's biggest banks have gone bust. So the banks themselves, the ones that are re-grouping and the ones that have always been there and weathered it, are going to look at everybody else. If a bank can go bust then everybody else can and they're going to kick the tyres fairly long and hard to make sure that they are as viable as possible.
Mark Conboy: The lending proposition for borrowers is now so complex because you’ve got invoice discounts, asset lending and mortgages provided by other organisations other than just the mainstream banks.
Andrew White: Banks make money by lending money, so it's in my interest to grow the income of the bank and lend money. So I'm looking for new business and secondly the government are actively encouraging the banks to lend money so we're not just going to turn propositions down or make life hard. There are good reasons to be out there doing good business.
To what extent is new money coming into the market or is it just money that's recycled from the other banks?
Edward Spencer: Well, that is incredibly hard to quantify. All I can say is that where we've got a business that's coming from another bank, obviously you want to be alert to the fact that this may be a distress situation and so again we'll look at that fairly carefully. Where we're satisfied that it's not a distress situation and it's not going to be in insolvency in the next couple of weeks and we do actually lend to it, that's probably fairly representative of new money I would think. We've made some good advances using the enterprise fund guarantee. It does have a use, there is a use for it, but it's not the panacea that means every business will get money through this scheme because eventually the taxpayer is going to pick that up if it goes wrong.
Andrew White: We're seeing a focus on structure that perhaps was lacking before. So by structure I mean using finance lines and using trade lines, using asset finance lines. Firstly because it helps the bank follow its money, so we can understand what we're lending to much better. Yes, perhaps lending has been too weak over the last three, four or five years and the banks have tighter criteria in place now.
Edward Spencer: Some credit has to be given to banks for realising that the actual loan to value of the global book has dropped quite sharply. It's probably nowhere as healthy as it was two or three years ago, therefore sustainability of those businesses has to become paramount now because you can't do much about the security. They look long and hard at every single company that they've got and every new one that they’re going to get in the right way. I think it has been, from my experience, really quite measured and banking is being done the old fashioned way. The way I grew up with it in the 1980's is now coming back again. It is now fashionable again to be a boring banker.
Stephen Hodgson: There have been a couple of cases recently on commercial transactions where the customer has gone to the bank and the bank says "yes, in principle that looks good.” The valuation has then come in and that's backed up and the bank basically said to valuers "go back and do it again" because they think in their own minds that the figures don't stack up, and they're asking the valuers to come back with lower valuations.
Andrew White: The security shouldn’t stop you. If you've got viability, you've got affordability, if you can meet those canons of lending, there are a range of products that banks have out there that don't necessarily need personal guarantees.
Gaynor Dykes: The banks, a couple of years ago, were happy to take a piece of the finance requirements and then put an asset finance line in on the basis that the facilities were provided by the bank. We have experienced now that they want the whole package and they won't approve a deal unless they can get the whole package.
Les Nutter: There's some damn good businesses that have been on the wrong end of knee jerk reactions from the banks. The facility fee has very much now come back into the fore. I can think of three businesses were before there was no facility fee and now they've hammered them with a facility fee. One client was particularly frustrated that the bank wanted a facility fee of just over £20,000. Now, he finally agreed that the rate was OK but the bank would not renege on the £20,000-odd facility fee. That is a little bit galling and seems to be a knee jerk reaction. These are good businesses and all of a sudden we have a one off hit which will recur each year and the question is whether that is profiteering?
Edward Spencer: Quite often we haven't made a profit out of certain businesses. When a bank’s balance sheet is under pressure they will look to rebuild that balance sheet and look at every single covenant they've got to make sure that they get an adequate return on capital.
Mark Conboy: Perhaps part of the perception is that banks, instead of looking after their existing customers in the way one hopes they would do, are seeing that there's a bit of an opportunity instead of pricing it correctly.
What problems are borrowers facing when it comes to trying to secure finance?
Dave Shaw: We're seeing a couple of issues. One is the relationship issue between the banks and the borrowers and I think there's still a general distrust between the two of them. There's also scenarios where traditionally banks would be happy to lend mainly on the back of security that’s already there. There seems to be a general reluctance by some banks to actually lend on the back of those without charging an astronomical facility fee. So we're seeing a lot of opportunity were there's a good underlying business there but the banks don't have the relationship that they used to have with the borrowers to be able to understand what is really going on with that company.A lot of these are very complicated transactions and the relationship managers have moved on. We're finding that there's a lot of movement in the bank, which means that people don't know who to talk to and the people they do talk to don't know anything about the business or have very limited experience of it. They find it very hard to explain and obtain the funding they need because there's a whole period of time where there is four to eight weeks of somebody in the bank understanding the business, understanding the proposition.
Mark Conboy: There is a significant variation in the level of professional expertise that businesses can call upon, I think that's one of the things in this type of situation, experience counts for an awful lot. People who have been through a recession beforehand become experienced and know the steps to take.
Martin Newsholme: I think that banks have got a real market opportunity in the next few months. The banks have got to accept that for nine months they have been persona non gratis. But now that they’re getting better information than they’ve had for a number of years because they can actually get close to those businesses and help them out and give them the support they need.
Les Nutter: It's definitely the case that people are waiting until it gets a little bit better and then they could be moving banks. I think there's actually been a lot of sympathy for their relationship managers because they’re some times having to deliver bad news which they can do nothing about.