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Banks, Lenders & Investors Cash Flow & Forecasting Finance General

Is short term investment damaging future business prosperity?

For many years, the UK economy has depended heavily on consumer spending and on property speculation.
This may have led investors, even pension funds that require steady returns over many years, to focus too heavily on short term investment and gain and, therefore, on quarterly or annual reports and results thus undermining their willingness to wait for future returns.
However, the creative infrastructure that led to such inventions as the steam engine depended not only on “lightbulb” moments but also on people who were educated, skilled and above all had the time to think slowly and in depth.
Recently the Bank of England’s Chief Economist, Andy Haldane, has been worrying that the development of the internet has also undermined the ability to think slowly and in depth and thus the patience needed for business innovation and progress.
If UK businesses, from SMEs to large corporations, are to remain at the forefront of innovation they will need continued investment in the best brains, in research and development and in a decent infrastructure and that means investors willing to be patient for the long haul.
Is it time that more emphasis was put on education, training, employee development and perhaps even public investment in longer term projects to emphasise the importance of sustained effort and patience?

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Banks, Lenders & Investors Finance General Insolvency Personal Guarantees Turnaround

Director guarantees should mean cheaper borrowing

Financial institutions, especially banks dealing with small business loans, are often asked for loans by directors of companies that do not have insufficient assets. This places banks in a difficult position because they often want to help their clients but at the same time they can’t take risks with depositors’ money. The result is that banks frequently require directors to give a personal guarantee as security for money borrowed by the company.
If the business is subsequently unable to repay the guaranteed loan then the bank expects to rely on its guarantee. Accordingly guarantors are now asked to seek legal advice before signing a guarantee or at least confirm they have been advised to get advice before signing.
Directors should therefore be mindful of the obligations they may be taking on when seeking business finance and weigh up the pros and cons.
We are, however, aware of clients being told by bank managers that they would never expect to actually call upon the guarantee. This confuses the issue as it begs the question why take a guarantee. However most likely if a guarantee exists, it will normally always be called upon in the event of a default providing the director has sufficient personal assets.
While a bank relationship manager may be uncomfortable asking a client to sign a personal guarantee and often confuse their client by trying to reassure them, the bank’s in-house recovery team won’t have a problem if the a bad debt is passed to them.
Some commentators and many aggrieved directors have tried to turn this into an ethical or moral issue but it is straightforward. Banks need security and they should not be lending money at risk, at least not retail or commercial banks. In turn the reduced risk to the bank should attract a low cost of borrowing to the client.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

An interesting idea to stimulate SME lending

According to the Business Secretary, Vince Cable, bank lending to SMEs is being “suffocated” because the Bank of England is blocking reforms to regulations on the reserves lenders are required to hold.
Under current rules, these have to be higher for business lending than they do for residential mortgages because the former are seen as higher risk than the latter. The BoE also claims that the rules cannot be changed because they are set internationally.
Meanwhile the Government’s business bank has so far lent around £780 million and is experimenting with a scheme to underwrite commercial lending to SMEs with Government funds, welcomed by the BCC (British Chambers of Commerce) who want the business bank “radically scaled up” and strengthened.
While at last there seems to be general agreement that there is a problem with bank lending to small businesses there seems to be little idea what to do about it.
Andrew Haldane, writing in the Telegraph has a suggestion, based on a commission carried out in 1931 that identified structural issues in providing SME lending, which was called the Macmillan gap after the Commission Chair, Hugh Macmillan.
It showed that while large companies tended to have a track record for profit and performance, making it easier to establish their creditworthiness, smaller ones generally do not – hence the gap. He suggests that one way of making it easier to assess SME creditworthiness is to establish a freely available credit register or database of SMEs credit history and revenues.
This would bring together data from credit reference agencies, banks, HMRC records and other government agencies to provide comprehensive information freely accessible to potential lenders such as pension funds, insurance companies and companies supplying trade credit.
Would it work and would it help?  Haldane cites “academic evidence” of considerable benefits.
This would certainly identify leads for turnaround and transformation advisers but will it stimulate lending?

Categories
Banks, Lenders & Investors Business Development & Marketing General Turnaround

Short term thinking is wrecking the UK’s future

As if risk averse lenders were not problem enough UK businesses have long complained that there is too much short term thinking stifling any chance of recovery.
Increasingly we have career politicians with little or no experience of business or life outside Westminster and with little incentive to think beyond the next election, so we get tinkering with taxes and regulation on businesses without a long term strategic vision.
The financial Industry, too, is more concerned with short term rewards (dividends, gains and bonuses) than in long term investments in industries that make stuff or have innovative ideas.
Shareholders and investors have been focused on short term dividends or income rather than investing in the longer term.
We need to encourage money to be invested in the right places and for the long haul.
It seems, some are beginning to agree. At a conference in London on Friday, May 10, called Transforming Finance, academics, campaigners and financiers will gather to develop ways for building a better banking system. http://tinyurl.com/cxnvyyr
Among them will be Catherine Howarth, CE of Share Action, a lobby group which will be emphasising the point about the need to think over the longer term.

Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery

Times are Tough for Commercial Landlords

Commercial landlords are coming under pressure from all sides in the current economic climate.
The plight of those landlords in the retail sector has perhaps been the most widely publicised as more and more empty shops appear on the High Streets where retailers have either ceased trading or moved out of expensive and badly performing outlets.
The problem for landlords is the double pressure of receiving no rent for their empty properties while still being liable for paying expensive business rates, calculated at approximately 40% of estimated annual rental value, a considerable burden.
Recently Dixons, owner of Currys and PC World, revealed that it had agreed with some of its landlords, to pay rent of just £1 a year in exchange for Dixons continuing to pay the business rates. Dixons is not the only retailer with business rate only deals with landlords.
Problems are not only in retail, however. Many commercial landlords are struggling as their tenants downsize, restructure or go out of business altogether, leaving empty industrial and office units for whom new tenants are hard to find. They still have to service their own loans as well as securing their empty premises and paying rates.
Added to this is the change in attitude among lenders towards property companies. Property loans are generally provided by banks who are now asking for much more equity and much better tenant covenants with evidence of a secure income when considering new or renewal of commercial mortgages. Banks themselves are already overloaded with vacant and distressed property assets.
The confluence of pressure is leaving many commercial landlords completely boxed in and adding to the problem is the amount of commercial property on the market.
A related issue is the number of businesses that cannot be sold because of an existing lease obligation. Buyers often want to downsize and therefore are seeking to renegotiate lease terms before purchasing the business.
There are formal and informal restructuring options that can be used to help commercial landlords who are dealing with vacant and loss-making properties but restructuring property portfolios is a complex process and every single situation is different.  This is a situation that requires the knowledge and skill of an experienced restructuring adviser.