“The Broken Banks” by Ian Priest A presentation for Biz-Smart

To highlight some of the challenges facing commercial borrowers To offer an insight on the way banks make their lending decisions The Broken Banks The aim of this presentation

About us Its not just miss selling The intermediary market and its pitfalls The present lending climate How Banks lend money – the information they look at and how the process works The flaws in the system… …and how borrowers can overcome them The Broken Banks Contents

Trading since June 2000 Experienced and fully qualified lenders Individually over 36 years experience We arrange finance and advise on banking and business issues Over £280 million raised to date Authorised and Regulated by the Financial Conduct Authority ABOUT IBC General information

Since about 1985 the emphasis in banks changed from professional to sales Staff were bow beaten by sales targets and managing by numbers Miss selling was more about fear of the sack than bonuses Thirty years training staff in sales not banking has left and enormous knowledge gap Lack of knowledge and the skills gap is impacting on many businesses Its not just miss selling Structural problems in banks

Accountants Business advisors / consultants  But neither of them are specialists at dealing with banks Finance brokers  But they throw up other issues INTERMEDIARY MARKET Where do borrowers go for help?

! Beware – commercial finance is still largely unregulated! Ltd companies beware ! So there are many unqualified and inexperienced operators… ! …and the quality of advice varies widely ! A one size fits all approach is common ! Potential conflicts of interest as many simply “follow the fee” INTERMEDIARY MARKET Finance Brokers – what are the issues?

An abnormal market due to the credit crunch Some lenders stopped lending Money has been in much shorter supply So banks feel they no longer have to compete as strongly for borrowers Prices have risen across the board Lending terms have become much tighter THE PRESENT LENDING CLIMATE The era of cheap and easy money is over- or is it?

CHARACTER ABILITY MARGIN PURPOSE AMOUNT REPAYMENT INSURANCE (Security) HOW BANKS LEND MONEY 1. CAMPARI – A basic analysis model

CHARACTER Trustworthy? Credit checks Money laundering Track record if existing customer HOW BANKS LEND MONEY 1. CAMPARI – A basic analysis model

ABILITY Age and health Business acumen Skills and qualifications Experience in running a business Quality of management team Trading history HOW BANKS LEND MONEY 1. CAMPARI – A basic analysis model

MARGIN Is bank’s return on lending sufficient? Interest / fees / charges Return should reflect the risk taken HOW BANKS LEND MONEY 1. CAMPARI – A basic analysis model

PURPOSE Legal Within bank’s lending policy for the sector Clear need for the finance Term of facility in line with stated reason – e.g. property 25 years; van 3 years HOW BANKS LEND MONEY 1. CAMPARI – A basic analysis model

AMOUNT Should not be too much or too little How does it compare to value of business and the amount already being borrowed? What is borrower’s cash stake? HOW BANKS LEND MONEY 1. CAMPARI – A basic analysis model

REPAYMENT Source must be clearly identifiable – e.g. profits, asset sales etc What do profit and cash forecasts show? How do they compare with historic financials? What reserves are there in the background? HOW BANKS LEND MONEY 1. CAMPARI – A basic analysis model

INSURANCE (Security) Seen as an alternative repayment source Many different types Each is viewed very differently – e.g. bricks and mortar more attractive than a guarantee Security is not the deciding factor – that would be pawn broking! HOW BANKS LEND MONEY 1. CAMPARI – A basic analysis model

Meet with a manager to discuss proposal Provide information and answer questions Manager writes a report Sends it to an underwriter They have a discussion on whether to lend Manager advises terms to borrower HOW BANKS LEND MONEY 2. How the process typically works

This process for making lending decisions is inconsistent, and flawed in many ways…  Too reliant on one manager – workloads, experience  Use of written reports has many shortcomings!!  An underwriter is the ultimate decision maker  Poor relations with underwriters can create problems  Borrowers cannot deal direct with the underwriter HOW BANKS LEND MONEY The flaws in the lending process!

 Problems with other borrowers can affect an underwriter’s decisions  The whole process is conducted behind closed doors  Borrowers never know how their case was presented  These factors will combine to influence the outcome and the terms offered In short, borrowers do not have enough control or influence over the lending decisions that affect them HOW BANKS LEND MONEY The flaws in the system!

The best person to negotiate with a lender… is another lender We know how they think and ‘speak their language’ We write lending proposals for the banks to use internally – so we influence the content and analysis Banks have to compete with each other to win By exerting more control and influence over lending decisions, borrowers get better terms THE FLAWS IN THE SYSTEM Exerting more control & influence – how we do it

It’s a tough market There are few sources of reliable and competent advice The way banks make lending decisions is flawed Borrowers need all the help they can get in navigating the banks’ credit processes! COMMERCIAL FINANCE MARKET Summary