We first starting writing about the impending economic doom back towards the end of last year and, whilst it is satisfying in one respect to have been proven to have made a good call, we share the concerns and pain that the large majority of people in the country will be feeling in either their personal or work life or, sadly for many, in both.
We have seen a lot of comments from people calling for the banks and other finance providers to show forbearance to their customers – both personal and business – in these ever worsening times and we are aware of a number of businesses that are pleading with their lenders to go easy on them and not initiate recovery procedures in the face of loan defaults. Here at SKSi we firmly believe in negotiating with creditors to achieve a better outcome and remain convinced that approach will lead to the best possible outcome.
However, we thought it about time we sat the other side of the table and gave our existing and potential clients the view from the lenders perspective. Having spent 12 years working for an international bank, undertaking distressed lending and credit sanctioning corporate and leveraged transactions I feel suitable qualified to provide this insight.
The role of the head of the lending division is to provide a return on capital by lending to businesses that, based on the research done, will be in a position to repay capital and interest over the prescribed term of the loan. The term needs to be a period that is reasonable and, most importantly, achievable for the business and the interest rate charged needs to be at a level that is affordable to the customer and that will provide margin against the risk of default – something which is inevitable, although part of the research is to minimise the risk – and still return a profit on the entire loan book.
Following the banking crisis in 2008, Tier 1 Capital requirements were significantly increased. In basic terms this meant that the banks were required to hold a far greater level of capital against their risk portfolio. This had the effect of increasing the cost of that capital which needs to be recovered through their lending, hence higher interest rate charges. At this time banks were also required the cut their property lending by circa 50% which hit the secondary market, again increasing finance charges compared to before the crisis.
On the one hand I always had sympathy with my clients but the harsh reality was that I had to ensure we ran a profitable loan book and kept my bosses and our shareholders happy. So whilst your lender is most likely sympathetic with your plight, the fact is that they will need to protect their jobs and their hierarchy within the bank.
So does this mean you can’t renegotiate? I firmly believe the answer is no – of course you can. Whilst banks are not charities, most lenders are pragmatic.
Our advice is to approach your lender the moment you have cashflow issues. In our experience, most businesses do not do this, instead trying to find a way out of the problem. But, as we have said so many times before, time is key. Early engagement with your lender is essential as more options will be available to you – leaving it longer will reduce the options and may mean that decisions will be taken out of your hands.
Back in my banking days, when a client came to me saying they couldn’t pay they got a curt response and I told them to come back with a detailed plan on how they could meet their financial obligations. Banks will consider a variation to the terms of a loan or a debt restructuring provided that you have a realistic, well presented and viable proposal supported by a robust and detailed cashflow projection.
Put yourself in their shoes and consider the fact they have to justify their decision to agree to any change in terms – but that is far more palatable than having to tell their boss about a default and write-off. If you are able to gain their trust and belief in your business plan you will have a successful negotiation.
However, if the approach has not been made early enough and the lender is not in agreement you may need to look elsewhere for a solution. We can help you in negotiations with your lenders or, with our colleagues in SKS Business Services Group, we can assist you in accessing alternative sources of finance.
We have successfully negotiated with creditors for a large number of company directors who, when first contacting us, thought there was no solution. These negotiations have been with all class of creditors including banks for BBLS repayments, landlords who have agreed to revised lease terms and asset backed lenders.
We urge every business owner/director that is facing financial difficulties to act decisively and seek independent professional advice and that is why we are always available for an initial zero cost assessment which can be arranged by contacting Alistair Dickson.