Saturday, 28 February 2009

Banks And Companies

On 9th February, Antony Worrall Thompson was on Breakfast TV bemoaning the lack of help from his Bank. He is able to do that, him being a celeb and all. His Bank certainly won’t comment, due to confidentiality issues.

He has said he was forced to close four restaurants despite knowing "we would have been strong again by December" The celebrity chef confirmed that AWT Restaurants Ltd went into administration on Friday.

Now I don’t know anything about his business affairs but some questions obviously arise that aren’t explained or apparently understood here. In the general way of things, a Bank will not lend without supporting security. We are asking Banks to be more careful these days so that is really not a surprise. In fact it has always been the case. The level at which security becomes economically sensible is from say facilities of £10000. It is possible to get unsecured facilities as a trading entity up to about £25000. There are exceptions, I have recently separately come across two at £100,000 but a rule of thumb is a maximum of £25000.

It is worth mentioning that while a Bank may not lend if there is no security, the opposite is not valid. A bank may still not lend, even if there is security. The lending is on the proposition and security is never intended to be realised. It is a long stop; a safety net..

In the case of a restaurant business with a number of sites the likelihood is that they are all leased. Probably they are all short term leases as well which is considered for sensible reasons to be less  than 25 years in some Banks and more in others.

With a limited company’s account the Bank has no one to go after in the case of default. That ‘LTD’ sign is actually a warning to traders. Don’t sue the shirt off us or we’ll all resign and put the company into liquidation. The whole point of a limited company is that it has a limited liability. With small companies in leased premises there are few assets of value to be sold to the vultures in the event of liquidation.

In a Bank’s case the way round is to take security from the Directors personally thereby tying them into the deal. This is often done with a personal guarantee, which is not worth much unless it is ‘supported’. This is usually done by a Charge (a Mortgage in fact) over the personal homes unless other property is available instead. Bearing in mind it is never intended to take action on this, the home owner has exactly the same arrangement with whoever lent the money to purchase the property in the first place. The Mortgage is simply a legal interest in the property with a power of sale in the event of default, and after proving it to the courts. They can’t just turf you out.

Mr Worrall Thompson said this morning that he wasn’t prepared to put his house on the line. The bank evidently could not get covering security any other way it seems. The reason for requesting facilities was to help out in the economic downturn it was said. That sound very woolly. Where there is a particular way forward the case is strengthened so if money is expected from a particular transaction then the exit strategy for the deal is known and can be assessed. A vague, help me out until it gets busy again is not a sound basis for a banking proposition and if the forecasting is over developed to show that it is the way out, the gaps in the story will start to appear.

We don’t know any of this for this case. I use it merely to point out a lesson in normal business. Despite what you read in the papers, Banking is not done on a whim if they feel in the mood that day. Some would say it was better when it was more that way, and you had a local Manager you could butter up with a round of golf, or tickets for the match and a bottle at Christmas. While not a precise science and leaving a little room for discretion and gut feel, the modern Bank has an array of computer aided figure analysing at its disposal and some heavily applied methods.

Remember the Bank will lend because the proposition is good. To help build a good banking proposition it helps to have the interpretation of an experienced professional consultant before you approach the Bank. What seems common sense to you and the rest of the Pub may have wider implications.

To cut through all this nonsense take some advice from industry specialists Bob Shepherd Associates.

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