Friday, 3 September 2010

Lending Jig Saw

It’s a bit like a jig saw. Whenever I am asked to help raise some finance, be it grant, bank or investment I start looking for the jig saw. The pieces of the puzzle have to fit together, the picture has to make sense and relate to what I have in front of meand as every jig saw puzzlist knows, you start with the outline.
It doesn’t really matter how much the sum involved is, in so far as the principles remain the same. During this last week I was approached by someone wanting to raise £42million. My very first thought of course was that is a large sum to ask for, it’s very specific and I wonder what sort of project we are dealing with.
As I explained the principles will be the same no matter what the sum. The first pieces of the jigsaw I am looking for are that my caller moves in those sorts of circles, has some substance and perhaps other worthy people involved. I am also looking for some appreciation of a scheme to put it together with other contributions to come from elsewhere, to form a balanced package of resources that stack up for a sustainable project that is viable and sustainable over a period beyond what it takes to pay off the lending or investment
As it happens my caller had none of those things, was not contributing anything himself and I have no idea how he arrived at that particular sum.  I concluded within a sentence or two that he was a victim of what I have called ‘pub talk’ or perhaps he had just had a new phone with a calculator on it. Diplomatically I pointed out that a problem he had with that sort of sum is that people are (rightly) wary of a quick rich scheme and whatever the true case he is up against all the scams and freeloading frauds ringing alarm bells. His credibility and that of his scheme needs establishing before any further examination takes place. I also said I looked forward to seeing him quoted in the FT in a couple of years. I don’t really expect that. In short, I think he was the missing piece looking for his jigsaw.
So what is needed with a proposition is a balanced basket of things, starting with You;  who you are and where you are coming from.  That means what experience you have, what background you have that gives any comfort that you know what you are talking about.  Next is some sort of contribution yourself or yourselves.  The world is full of bright ideas looking for a philanthropic backer fancying a punt. Not many find one. The world is also full of people who say if only they had a few thousand more, just think what they could do!
So, Background first, then ability, then means. That is a shapeless concept that comprises your resources and your worth. That may not be money; it may be expertise or equity in a property for example. It means your substance and less so, your standing.
Next we look at idea, the ‘proposition’.  If the first things are in good order it is unlikely you will be pursuing a fatuous scheme with no viability, however that remains to be seen. The project in mind has to be reasonable. That is legal, that is well balanced, that is ‘a good idea’ and capable of being shown to be so. There is very little that is actually new in the broadest sense. When Dyson started making his carpet sucking and brushing mechanical devices he had some new ideas, and not least the price it seems to me, but the concept of a vacuum cleaner already existed. An interesting side issue is the concept whereby a product becomes known by its maker – say ‘a Hoover ‘ to anyone and they know exactly what you mean and think nothing odd if it is made by Electrolux or anyone else.
Only now in our fictional account of an ideal finance proposition do we come to the amount. If we have come this far with full marks, it is unlikely that the amount is going to be untoward.  Look how far down the list we have come.  The idea that you go to the bank and they say how much do you want and check on the repayment only exists where all the other factors are a given.
In a former life I once had a respectable gentleman come to me saying he wanted to borrow £150 thousand. He said, ‘you know who I am and where I live’. I asked what it was for and he said he wasn’t going to tell me. In that case I am not going to lend it to you, I informed him politely. I was thinking ‘this is not going well’ and as a passing concern wondering how much flak and trouble he was about to cause me with some senior Bank official he probably had as a mate at his club somewhere.
The repayment scheme or exit strategy for an investor is next. There are different schemes with varying labels at any Bank. Most simply, there is an overdraft – an agreed limit to which you can do what it says and draw more than is in your account. Some banks are busy trying to dispense with business overdrafts which is a pity because a facility of variable amounts to be used to iron out the bumps in a trading pattern is sometimes the ideal vehicle. 
Then there are loans, which is an overdraft on a separate account with an agreed transfer amount taking place. More often these days there is a fixed loan, which has a fixed interest rate and therefore a definite calculation which enables a certain amount for a repayment transfer to take place bringing it right to the penny in a fixed number of repayments. Anything else is a minor variant on these basic types of lending. It has to make sense. It has to be affordable and it also has a relationship with the term of the loan. There comes a point on the graph where extending the term does nothing to reduce the amount of the repayment because of the compound nature of the interest calculation.
Once the background, the characters involved and the amount makes sense we are almost there. Security comes next. No Bank will ever lend just because there is security available. ( q.v. my self important friend with the £150k request). What might happen is that they don’t lend because there is no security.  That would be unusual in the context of the process we have seen but what is more usual is that there is not enough to cover the case. A Bank will look at property (typically) and give it a security value of around 70% of its market value. There are good reasons for that to be explored in another article. Other assets may be at a lower value still. In company terms that is often the case with machinery or debtors for example which have different considerations.
These days we have a government guarantee scheme that might pick up the case for a cost, if the proposition is good but falls down only because the available security is a bit short. Currently that is extended until March 2011 but is so useful that it could be continued or rise up in another form after that, I should think.
There are other matters to be brought in such as Life Cover for the principal people involved. The structure of the company/partnership/business needs looking at and there a host of sub issues along the way. Using Bob Shepherd Associates gives you a chance to  air all this first before going to the bank and then when you do, the Bank is friends with your proposition  because it all hangs together in a sensible and workable framework. The jig saw is complete. 

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