“One would have had to have been living on another planet not to have noticed the huge fanfare that surrounded the launch of Project Merlin last month (February). In short, Britain’s largest banks have signed up to a series of pay and lending reforms as part of a Government-led deal aimed at calming the criticism that the banking community has faced since the financial crisis began.

“The UK’s four biggest lenders – Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – have committed themselves to making £190 billion of gross new lending available, £76 billion of which is ‘new’ lending to small and medium sized enterprises. The proof of the pudding, as they say, is in the eating.

“Touch Financial’s own research, conducted shortly before the new initiative was announced, made it very clear that banks were not lending, despite what their PR machines suggested to the contrary. Out of 300 businesses questioned, just under half (47 percent) had been turned down for a loan in the past 12 months and 70 percent knew another business who’d been turned down for finances over the past year. A resounding 92 percent felt that the Government needed to force the banks’ hands in lending matters, so to this end, Project Merlin is a welcome move.

“So why do I have such a problem with it? Perhaps it is because there is a potential disconnect between what some banks are saying, and what they are actually doing. There is plenty of hyperbole around ‘commitment to the SME community’ with as yet little evidence of what is being done and certainly little talk of Invoice Finance. It is early days, of course, but I worry that not all banks understand the critical importance of Invoice Finance to the SME community. It appears that banks’ creative thinking rarely takes them beyond the basic loan or overdraft, repayable on demand, so that the risk is all one sided, and further funding is not available until the original loan has been repaid. They either don’t think of factoring, or if they do, it seems they are not aware that they have a dedicated Invoice Finance division that could help.

“Banks argue, with some justification, that companies that are heavily indebted are not viable; we would argue that many such businesses are viable, but are simply not being made aware of alternative financing options available to them. Relying on an unsecured overdraft offers little stability for a business, as many found out last year to their cost when the banks called in their loans. However, Invoice Finance – favoured by those without sufficient security or a strong track record required for an overdraft – is fast becoming popular with mid-tier businesses.

“Invoice finance offers businesses funding based on their most viable asset – their sales ledger. It serves to immediately release cash tied up in unpaid invoices, giving the business immediate access to cashflow it has already earned but not yet received. I believe it presents the best opportunity for banks to offer controlled access to stable funding based on a secure asset. I also think that it would enable banks to show their true appetite to help small businesses – beyond an agreement that is fast looking like it is not worth the paper it is written on.

“Banks are missing a huge opportunity to embrace Invoice Finance through what can only be described as an outdated notion of it being ‘finance of the last resort’. The truth is that it is only a lack of knowledge of where and when invoice finance is appropriate that is preventing its wider use.

“If banks genuinely do have an appetite to lend, then they should lend to businesses based on the viability of their sales ledger. We’d like to see banks make Invoice Finance a mainstream product for their business customers, and give bank managers better training on all the products available to their customer, even those which, up until now, might have been considered niche.”

Article contributed by Simon Carter of Touch Financial

“Businesses will apply in the same way they would apply for the Enterprise Finance Guarantee Scheme,” said a spokesman for the Department for Business, Innovation and Skills (BIS).
 
“When they go to the bank for a regular loan and they’re not eligible then the bank should offer this as an alternative. To be successful with the application, businesses would need to have a credible plan of how they intend to export overseas.
 
“Our research shows there is demand for this, but we don’t yet know what the take-up will be. It will be reviewed after six months, but we’re hoping that it will be as successful as Enterprise Finance Guarantee.”
 
He added that it will give small businesses access to the credit they need to trade overseas.
 
“It can take longer to receive payments when trading overseas, so this should enable firms that couldn’t otherwise afford to export to expand overseas,” said the spokesman.

Article contributed by BCR Factorscan

Image copyright: Flickr

For centuries, business people have been treating their favourite clients to corporate lunches, Christmas gifts and other tokens of their appreciation. However, when the Bribery Act 2010 comes into force this April, some of these ‘standard practices’ may well become criminal offences.

Much of the worry stems from the fact that the Act does not clearly define what a ‘bribe’ actually is. According to the legislation it could be a payment, a financial inducement or in fact “any other advantage”.

Jonathon Newman, Brightstone Law LLP, said, “The lines of acceptability are somewhat vague. Each case is fact sensitive and a degree of caution and good sense will need to be applied in each instance.

“So, in terms of corporate entertainment, hosting a small get-together at your office for a broker may be perfectly reasonable and acceptable, but treating an introducer to an all-expenses-paid trip to Monaco for two weeks for a single transaction may not be.”

To add to the severity of the Act, for the first time ever companies will be liable for the corrupt activities of third parties as well as their own staff.

The Financial Services Authority (FSA) has predicted that many broker firms will be liable under the new laws because “there is significant risk of illicit payments being made to, or on behalf of, third parties to win business.”

Yet despite these warnings, many brokers and lenders know very little about the Act. Some heard about it for the first time just few weeks ago.

Gavin Diamond, Head of Finance at Cheval, said, “I have not seen any recent press about the Bribery Act but was alerted to it by our compliance consultant.”

James Rainbird, MD of Pink Pig Loans, added, “I only heard about the Act in January during an Association meeting, but my ears were certainly pricked when I heard the news. I think it is inevitable that this will affect businesses within the financial sector. We have always declared our fees and the remunerations received from our lenders, but I am sure not all companies do the same.”

The level of concern from brokers and lenders within bridging and commercial lending differs hugely, with some saying that they are not at all concerned and others doing all they can to learn more about the Act and protect themselves as a consequence.

In terms of corporate hospitality, the overall opinion seems to be that ‘reasonable’ practices, where there is no intention that improper business transactions are carried out, will remain acceptable after April.

Gavin Diamond said, “It must stand to reason that the Act is aimed at preventing the inducement to act improperly rather than rendering de minimus corporate gifts and entertainment to be illegal. I can only hope that guidance notes will be published to assist companies in putting practical procedures in place to prevent getting caught out by the new Act.”

James Rainbird added that the opinions of a company’s legal team will play a large part in the way a company changes its activities as a result of the act.

Some lenders though are actually welcoming the Act. Mark Posniak, Head of Marketing and Operations at Drawbridge Finance, said that there are “definitely some positives” to be gained from the Act because it will help to create a “level playing field”.

“We already disclose all our payments to brokers and we are not overly concerned by this latest Act. I don’t think that companies who offer a good product and have a good proposition have ever worried about bribery because there is no need for it,” he said.

Over the next few weeks we will continue to learn more about this Act and how it will be imposed upon financiers on a day-to-day basis. But the real consequences of the Act will not be known until after April, when it is likely that a company will only discover that it is guilty after the sentence has been made.

Article contributed by Katie-Jill Rowland – Editor, http://www.bridgingandcommercial.co.uk/

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Over the past year, the media has been full of terrible news about the availability of credit to most companies, especially SMEs. Many lenders, even relatively healthy ones, seemed to have tightened credit standards considerably.

This has often made life, already difficult in a weak economy, even more challenging for many companies. On this background, it is illuminating to look at the lending practices of Svenska Handelsbanken (also familiar to readers of the news because they just topped customer satisfaction polls.)

The common approach to lending is illustrated by the first graph which shows lending to corporate customers in the Eurozone. Most banks influence their lending decisions top down depending on their views on the economy and their outlook for loan losses. This can reduce the influence of the loan officer handling an individual case. The loan officer might have performed a thorough quantitative and qualitative analysis of the prospective borrower. But in this system, a loan that would have been approved a year ago is now declined. This is illustrated by the chart: at the beginning, when the economy was still recovering from the dot com bubble, banks were still fairly strict in their lending standards. But as the economy started growing nicely and steadily from quarter to quarter (the blue line), lending standards (the green line) were relaxed more and more. The result: loans to corporate customers were growing faster and faster (the red line). The moment lenders see signs of a weakening economy, lending standards are reined in and loan volumes fall as a result. This approach seems rational only for five seconds because drastically cutting off lending exacerbates the economic contraction that lenders were afraid of in the first place. And this policy generally leaves banks with loans made on wafer thin margins in good times when quality can really only get worse, but they do not make loans on much better margins at the trough of the cycle when credit quality could arguably only get better.

Figure 1: Eurozone GDP growth (quarterly), lending to corporates and bank lending standards

Handelsbanken, by contrast, does not change its credit policy over time. It does not believe in GDP or other macro forecasts. It rather believes in sound credit analysis of an individual customer. Hence no need for the bank headquarters to tell the loan officer at the front line how to do his or her job. In addition, the bank believes in Warren Buffett’s insight that “it’s only when the tide goes out that you know who is swimming naked”. In other words: during good times both good and bad credits look similar, but in tough conditions like today’s it is fairly easy to spot the good customers you want to continue lending to. Handelsbanken’s bankers have a much more satisfying and intelligent job where they can use their expertise and judgement to come up with their own best credit decision.

As a result of this policy, Handelsbanken’s lending to corporates is highly counter-cyclical. When everyone else is competing to lend, Handelsbanken’s market share drops, and when no loan is to be had from any other bank, Handelsbanken keeps lending happily and increases its market share again.

Does it work? By following this very simple and common sense approach, Handelsbanken has achieved a twin goal of having higher margins than their competitors AND loan losses that are consistently about 50% lower. The bank follows the same approach with the same results in other countries such as the UK. The loyalty to their customers even in bad times may be one of the reasons behind their stellar customer satisfaction.

Unsurprisingly, many other banks are looking at the Handelsbanken model today. Experienced loan officers should be in for a bright future.

Figure 2: Sweden, lending to corporates

Article contributed by Niels Kroner, author of ‘A Blueprint for Better Banking‘

Article cover image copyright: Flickr