The Commercial Lending Crisis

My last article was about how the high street banks are failing to provide an acceptable level of service to their current account holders. However, their is a bigger problem still with the banks and that is that they are no longer prepared to lend money to business owners on acceptable terms.

Until a few years ago a large proportion of the business sales that we dealt with were financed by a loan from a high street bank. The banks were happy to lend and the loan was usually secured by a debenture over the business being bought or sometimes a debenture over the buyer’s existing business.

If the security available within the business was judged to be insufficient then a personal guarantee would be requested. This would usually be for a fixed amount of money and would sometimes be unsecured and sometimes be secured by a change over a fixed asset such as a buy-to-let property or, as a last resort, the borrowers home.

The lending rules changed suddenly after the financial crash in 2009. The banks became much more cautious and the amount of security required was increased but loans were still available. However, since Liz Truss’s disastrous budget the rules have changed again and obtaining a loan from a high street bank on acceptable terms has become nigh on impossible.

We have good relationships with several specialist business finance brokers and loans are still available to buy a business but the terms are very onerous. The cost of the arrangement fees and the internet rate has trebled. However, the typical return on capital from buying a letting is 30% so it still makes sense to borrow money at 12% to fund the purchase.

The second problem is that most lenders will no longer lend money secured on the value of the business alone and want a charge over a physical asset such as a property in addition to a debenture over the business.  This seems unreasonable to me. A letting book is a tradable asset which can easily be sold if necessary. A sale usually takes about 24 weeks but a fire sale at a typical discount to the market price of about 30% can be achieved in 4 weeks. I cannot therefore understand why further security is necessary for a loan of up to 50% of the purchase price. Nevertheless, most of our buyers have a buy-to-let portfolio of their own and are able to offer additional security.

The worst problem however is that most of lenders will no longer accept a personal guarantee for a fixed amount. They want an unlimited guarantee over every asset their personal assets and their family home.  A lot of buyers are not prepared to accept this level of risk and as a result they walk away.

The unavailability of commercial finance is now having a real impact on my business.  An increasing percentage of our sales are new to established business owners who are already wealthy, business owners who have secured private backing, or the large conglomerates who are financed by private equity where different rules apply. This means that the letting industry is likely to be consolidated even more quickly and will end up in the ownership of an increasingly small number of large businesses.

I am not sure that this is necessarily a good thing. We used to deal with a lot of management buyouts but we only did two last year. We used to deal with lots of sales between partners where the senior partner would retire and a junior one would buy out his shirts. These two are now very rare and when the senior partner wants to retire if often now triggers the sale of the business. And I used to particularly enjoy selling a business to a young person who was prepared to gamble everything on their own success. One of these people bought their first business from me 30 years ago and now owns a group worth over £10 million.

If the government is serious about growing the economy a good place to start would be to pass legislation that compels banks to lend money on the fair commercial terms that served them well for so many years.  Sadly, the chances of this happening seem to be pretty remote.

Adam Walker is a business sales broker who has worked in the property sector for over 40 years.