The Greedy Bankers – I’d rather go bust than pay those rates!

by Mark Alexander

8:00 AM, 4th December 2012
About 8 years ago

The Greedy Bankers – I’d rather go bust than pay those rates!

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The Greedy Bankers – I’d rather go bust than pay those rates!

Greedy BankersIn my previous commercial finance blog I spoke about the cost of finance post credit crunch. This time my question is; would you rather go bust than deal with greedy bankers?

It seems like a bit of a daft question doesn’t it?

Why is it then that one of the reasons UK businesses are not even applying for finance is fear of cost?

I think we all have to accept that we are where we are in the economic cycle. Lots of things have increased in price, petrol being a prime example, but we haven’t all sold our cars have we?

I was speaking to a property developer only last week about his development finance requirements.  He explained his deal to me and he stood to make around £400,000 before allowing for financing costs. Previously his bank had provided an overdraft facility at a rate of 2% over base against the security of an industrial estate he owned and rented out (no mortgages). However, they are no longer interested in his business which he was not impressed with.

He had shopped around for finance before talking to me and had actually got an offer letter from one lender but was complaining about the extortionate finance charges being quoted by his “greedy bankers” (they were not his exact words). His point, which he made several times during our conversation, was that the charges would wipe out nearly half of his profits.

I wanted to see if I could help so I took down the key details and promised him that I would call him back after speaking to a few of my contacts. I did that but due to his circumstances, which I will not go into, they confirmed that the deal he had was the best he was likely to get.

I called him back as promised and gave him the best news that I possibly could under the circumstances; that the offer he had received was a good one in todays market. He wasn’t a happy man! Despite the fact that I had spent three hours researching this for him completely unpaid – I didn’t even get a thank you 🙁 All he was interested in was telling me how awful life is. Some people hey?

I was very tempted to put it in my diary to give him a call in about six months time to see if he progresses the deal. I suspect he will lose it as a result of prevarication. I’m not sure I want to expose myself to his negativity again though. Tempting as it would be to tell him what a Muppet he is if he does end up missing out on £200,000 of profits, is it really worth me rubbing him up the wrong way even more?

Could situations like this be yet another reason why we have a housing shortage and continue to hover around recession?

Commercial Finance Blog

This is part three of my commercial finance blog



Comments

1:51 AM, 5th December 2012
About 8 years ago

If the finance costs are half the profit when everything goes to plan, that is a very big risk if there is a delay on the project.

E.g, bridging costs are high enough that personally I would not be happy to have the stress of a project that had that level of outgoings when there are any delays for any reason.

Recardo Knights

4:02 AM, 5th December 2012
About 8 years ago

I agree with Ian, the finance company must think they are the government of the land. If YOU do all the work and take the RISK and things do work out, they will take 50% for nothing.
A bit like the mortgage Co's wanting £2-4000 to lend us money at no risk. We have to put in 25-30% LTV and if it goes wrong they can sell and get there money back.
A few years ago arrangment fees were about £300, the work they put in is no more than in the past and people do resent being screwed over just for a bit of paperwork.

5:08 AM, 5th December 2012
About 8 years ago

BUNCH OF ROBBING BANKERS
By Mike Woodfine, Co-founder of The Money Centre.

Interest margins are extortionate – you need an unsecured loan to pay lenders arrangement fees – loan to values are just down right depressing. It really does look like lenders are cashing in on everybody’s misfortune and I bet you are thinking now is not the best time to borrow money – but are you right?

If you don’t want a lender to make a profit – you are right – now is not the time to borrow money. If you have enough cash to buy everything you need, now and in the future, you may choose to give lenders a wide berth.

If, however, you recognise that the property market is now perfect for buying cheap property to add to your portfolio, but you haven’t got the money you may well need to consider biting the bullet and begin looking for the best mortgages you can possibly find. Sorry but you will need to talk to a lender.

There is a small amount of comfort you can take – it’s not much and might not make you forgive the lenders for what appears to be cut throat tactics and profiteering, but it’s something.

Just imagine you were a lender and you wanted to avoid risk to ride out the recession – you might keep what you had, not lend anything, repossess wherever you could make a profit or at least recover your money, and wait for the market to improve to such an extent you could lend again at competitive rates, be safe and make a healthy return.

Funnily enough this is what a number of lenders have done to some degree or other.

However, and quite fortunately, not all adopted the same tactics. If there is no money to borrow us property investors can’t buy property and enjoy what will be tremendous returns in the years to come. We very easily forget that the future returns will more than compensate for paying higher rates in the short to medium term.

Obviously as the market improves we will remortgage for better rates thus minimising what we are paying the lender whilst maximising our profit/returns.

The thing is though, if you want to be in a position where you are maximising your profits and returns, you need to be adding to your portfolio right now. The only one way to do this, assuming you didn’t win this months Euro lottery – you need somebody to lend you the money.

Now think about the deal you are offering:

Dear Mr Banker – I would like to borrow some money please to buy a house. I fully understand it will be expensive and you will make a profit out of me. However, please note that if it all goes wrong I want you to sort out the mess I have left and if I am bankrupt will you also bear any losses, which could be quite considerable. I would also confirm that when interest rates are more attractive elsewhere I will be moving banks to save money. When I realise any gains in the property you obviously understand I will not be sharing these with you – even though you provided the majority of the money to buy in the first place and have probably shouldered most of the risk. Nearly forgot – I keep all the rent too. With love ……

Let’s be realistic – if we want to make money by using other people’s money we have to accept that the arrangement won’t always work completely in our favour. If this is the industry we have chosen then this is what we need to get used to because without the lenders we are dead in the water. We don’t have to like them but I would suggest we stop viewing them as the enemy and redirect focus on building our portfolio’s by embracing the lenders as short term best friends and use THEIR money to secure YOUR future.

Perhaps it’s time to re-think your strategy?

9:35 AM, 5th December 2012
About 8 years ago

Hi Mark Lack of available of finance from banks is the very reason crowdfunding is growing in popularity. As you know, it's why I started The House Crowd and why sites like Zopa and Funding Circle are doing so well. Has your colleague approached Funding Circle - sounds like they would be a great solution for him. (I hear Wonga now have a business loans department...mmm perhaps not)

matchmade

12:10 PM, 5th December 2012
About 8 years ago

Mike: you are talking about a very different scenario from Mark - he wrote about a short-term property development deal, whereas you refer to long-term lending on an income-generating asset.

I don't think Mark's client needed to be so rude, and it would have helped to have some idea of the turnover of the project (£200K profit after finance charges on an investment of £400K is still a very decent return, but £200K on a £2 million investment looks much less attractive and could easily be wiped out by cost overruns or a fall in the sale price achieved). But I agree with Ian and Recardo: to have one's profits halved simply by finance charges looks excessive - either the initial profit margin was too small as a proportion of the overall investment, or the finance company views the project as extremely high risk and has imposed very high charges to compensate.

If finance companies really expect to take up to 50% of the profits on a deal, simply for providing a proportion of cash but none of the labour and with almost none of the risk - a 50% loan as a proportion of the gross development value, say, is very low risk, however you look at it - then I think that is excessive and I would rather seek funding elsewhere.

Mark says his client is a "Muppet" for walking away from a £200K profit, but I don't think the client is doing that: the client is well aware that hi £400K pre-finance profit is by no means guaranteed, and there are any number of things that can go wrong with his project. Each one of these problems will subtract from his profits, whereas the finance company expects to be paid its full whack whatever happens. If the finance company were a *proper* 50:50 co-investor, it would buy shares in a temporary special-purpose company set up to finance the project, and accept that its return might vary if the project ran into problems, just as the developer has to do. The imbalance of risk and rewards lies in the fact that the finance company expects a fixed percentage return from the deal, whereas the developer, who is also investing his own hard-earned capital, is told he must suck up every problem and take every financial hit all on his own.

Mark Alexander

14:18 PM, 5th December 2012
About 8 years ago

Don't read too deeply into the figures, I made them up so this guy wouldn't recognise himself. For all I know he could be a 7ft giant with a very bad temper - he came across a bit like that. It was more the principles of not doing deals based on finance charges that I was trying to get at in my blog. I don't have clients any more, I retired from broking in 2009 but I do try to help people out when they read my blog and contact me to pick my brains for useful contacts. This was one of those articles written in haste whilst the red mist was still lingering. It was the fact that he didn't have the courtesy to say thanks for my help after spending three hours of my own time trying to help him which really miffed me.

I fully concur with the other points that you and other readers have made in terms of the developer taking the first hit in terms of costs over-runs etc. That particular scenario wasn't an issue in this instance though as the developer was more of a facilitator in this deal, i.e. it was a build to order deal for a blue chip purchaser and the developer had contracted out the build to a major firm on a fixed price fixed term arrangement. His margins were tight but his risks were minimal.


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