As a banker with 30 years experience (and now a Finance Broker), I get asked why businesses that are otherwise sound, with strong cash flows, cannot get a loan to expand their business activities. In some cases even renewing the loan term proves to be difficult.
When I dig a little deeper, I find these are usually borrowers that fall into one of the following categories:
- No security – they have no assets to provide as collateral against the proposed borrowing.
- A security shortfall – banks can often discount the value of a security (sometimes by 50%) resulting in a notional security shortfall. This can be quite confusing (and distressing) for potential borrowers.
- An industry where banks no longer want to lend to. This happens from time to time when the banks portfolios get too heavily weighted into one sector.
It’s important to remember that your bank’s appointed representative (often a relationship manager) is incentivised to write as much lending business as possible.
It’s also important to note that banks will “fill their boots” with easy assets – as we’ve seen in commercial and residential property in the last couple of years. The key reason for this exuberance is not a mystery. It is, in fact, regulatory in nature.
A brief explanation – that will try and avoid the complexity of APRA regulatory rules – is provided below.
Firstly, APRA regulates the banks. It ensures that the banks follow a set of lending guidelines set down by international regulators. These rules were reframed post the Global Financial Crisis (GFC) and are referred to as Basel III.
The key point to note here is that Basel III made it less economic to lend to unrated and unsecured borrowers. It did this by forcing the banks to provide more capital against each unsecured loan it made to unrated entities (almost all small/medium businesses are unrated).
The result of this was that by lending unsecured to small businesses, banks were reducing the return on equity to shareholders. The activity almost dried up overnight.
So in-effect, we have returned to the days of pre-deregulation. Capital has been restricted and substitute lenders are beginning to enter the market – albeit in small numbers and with very small balance sheets.
What can you do?
There are other ways to source funding – albeit you will be paying a lot more for the debt. We at Thyme Financial Group, have formed relationship with the following groups that will assist in this aspect:
- Bank Funding – Despite the above, it should still be the first option. Sometimes the reason for being rejected by a bank has almost nothing to do with the quality of your business. It could be one of a variety of reasons:
- You’re industry is not currently being funded by the bank you spoke to.
- The banker you approached is not at the right level in the bank’s hierarchy. This happens more often than you think. Bank’s are very large organisations. Sometimes you will require the intervention of senior bankers. The business banker you spoke with may be intimidated by senior bankers.
- Was your marketing document a set of financials from your accountant? This is a common mistake. This approach is fine for secured borrowers and retail borrowers. But with a small-medium sized business that has strong cash flows, there are usually key areas that must be highlighted to give the loan the best chance of gaining approval.
- Mezzanine Debt providers – this debt can be acquired for between 3-8% above bank funding rates. Yes it’s not cheap but it should be used as a stop-gap and only when bank funding can be used after a short period to replace it. Mezzanine Finance can also be used as quasi equity and most sensible banks (and they’re not necessarily who you might think they are) will accept this kind of funding as equity.
- Unrated bonds – For established businesses that require repeated access to the capital markets this tool can be invaluable. Prices vary according to the quality of the cash flows of the business and it’s ability to repay the debt to bondholders.
- Private Equity – often these organisations are funded by private high net worth individuals or superannuation funds. If you thought your business was too small to tap into this market, think again. We have some private equity partners that are more than willing to fund quality small businesses. The catch: you (often but not always) have to give up part of your business to a third party.
If you fall into any of the above categories, even if you just want a chat, we’re here to help.
We are experienced in all aspects of lending. We will arrange funding that ranges from retail home loans to corporate and institutional loans.
Our principals have been involved in very simple and very complex financial structures. If you want a normal broker, any of our competitors can help you. If you want the benefit of our combined experience then please call us on the numbers on this website.