Well, that’s Ok then.
Yet another talking shop to stall the UK Government in taking action.
I use to have a Bank Manager that looked at the Business and then made a decision based on the income coming into the company and the creditworthiness of the companies we had contracts with. In this respect, we were lucky, as when we were AutoCAD dealers the name were from very well know UK companies. Such as COMET Plc, Channel Four, Merrill Lynch, Department of Health, Unipart, Vickers, Renault, Morgan Standley, WS Akins, Austins, Tussauds Group, BT, Quilter Goodison, Euro Tunnel, Charles Taylor it goes on……
However, the point is, the Bank took a view of whether they thought I was up to the job of running the business. This you cannot do without meeting the person(s) involved. It’s now judged on the basis of credit checks, Business Plans etc. All important thing to have. But, without meeting the company directors face to face it will be difficult to decide if the company asking for the funds is worth the backing. Accountants are very good at making business plans. It’s if the Directors can apply the business plan you need to account for.
Another, trick that the banks deploy is when is a loan not a loan? The Oxford Dictionary definition doesn’t apply. No cheating by google searching it!
What it use to be mean many years ago. At the point of the Loan issue or granting, the Bank looks at the company balance sheet and the asset you are trying to purchase and normally provides backing for about 65% to 75% on a good day, of the asset value that company wishes to purchase. Be it equipment or property for the business to operate in.
If the companies loan repayments are met. Then, the Loan should continue to its termination on this basis.
Just because the market conditions change, shouldn’t lead to the bank (Headless Chicken time) demand full payment before the agreed payments are due.
The original asset value should have taken into account the possible drop in market value. That’s why you loan at most 75%. The risk is always the businesses and this needs to be addressed as the cash flow issues caused by this behaviour normally takes out a business that kept their head above water.
Alternatively, don’t call it a Loan. Because it is not! It is an extended overdraft. So, Call it this.
The other trick that the Banks are constantly using is that they need a charge over your house. Now, I could understand this if there is nothing in the company for them to grab and sell in the case of the business going bust. However, when the Loan (See above) is based on a purchase of a company property this seems overkill.
Their answer is;
well if you are not willing to put your house at stake then why should we Loan to you.
Because you are supposed to be backing the BUSINESS, not the individual. We don’t ask the bank employees to put their houses on the line for our company funds that are deposited at the bank, do we?
Otherwise, the company directors might as well raise a Mortgage Loan on the property you want a charge over in the first place. If you are running an overdraft and can do a runner out of the country? Then I can sort of understand you want some security.
Eventually, they gave up. However, don’t let them take charge of the house. There is no need for them to do this unless they are going to give the same asset to your company for them holding the companies funds.
The only way for this sort of behaviour to be stopped is to make the Directors of the Banks responsible for the losses of they banks as a proportion of they salary and bonus. i.e Make Bonuses become negative as well as positive. So, if the company loses money then the bonus become negative on the company balance sheet. The negative bonus has to become positive before any other bonuses can be taken. The Same trick on dividends.
You will be amazed by the transformation this will achieve once it is their money that becomes at risk. Make taking Share Options very expensive in Tax terms to cash, before 10 years has past will then adjust the banks and companies long term view.
Of course, you could really hurt them by stating that they have to have 75% of their Loan Book value in Cash or Gold!
They will huff, puff and cry just like small children.
But, when have you ever got a smile when you have to take medicine?
Just a thought Chancellor.