I’m sure people must get fed up with me apparently hammering the banks, but believe me it is not because I want to. I deal with many business owners on a daily basis who are in desperate trouble and need urgent advice. The point is I am a contact point for business owners in distress so do pick up trends earlier than our political elite.
I have mentioned this before but it is worth mentioning again: "beware the bank trying to help you" – there is no such thing as a friendly bank. You may be lucky and meet personable people who work for the bank but when the chips are down they will pull the plug on your business without missing a beat. Sounds obvious but I had a conversation last week where a director had gotten himself and his company into financial difficulty. He dealt with major UK companies and they has started to lengthen his payment terms and this was hitting his ability to pay suppliers. His friendly neighbourhood bank allowed him to go into his unauthorised overdraft facility at a rate of 29.7%. So his charges were mounting up but he was in control.
He, naturally, contacted his bank and they offered to ‘help’ so his ‘friendly and supportive relationship manager’ made an appointment for him to speak to the factoring side of the bank. The bank obligingly provided the factoring services and indeed the company cash-flow improved for about 2-3 months. Then the real problems started. The penalties piled up because he was not following the agreed process or documents which is fair enough, I guess. Then as the bank got a better understanding of the debtor book they increased the charges and penalties without notice – as they have the right to do. His cash-flow went from bad to worse and he was now in a worse situation than before. Money was withheld and suppliers were getting angrier and withheld critical supplies due to none payment. Contracts could not be fulfilled and eventually major orders were cancelled and he was hit with penalties on that front too.
Any factoring facility will take a personal guarantee supported by a charge over all the company assets which included the debtor book and anything else of value. Oh yes and they had also taken a charge over the family home bless them. The bank put in their own administrator to take over the running of the business securing the interests of the bank and that’s when I was contacted (as usual).
I told him it was too late as once the bank have the charge over the company assets they become a secured creditor so have the right to put in their own administrator when they feel like they have the grounds. His voice was shaking with emotion as he realised there was nothing he could do and 13 years of hard work had been wasted and he now had to tell 18 employees they were no longer needed. It also dawned on him he now had to tell his wife that the family home was at risk and what the impact may be on his children.
The fact of the matter is in these circumstances a director loses all control over everything and the banks have secured their position belt and braces – what is wrong is the director is not allowed to protect himself by being allowed to manage the debtor book collection. If the bank don’t recover sufficient money in from the debtor book they have the director’s personal guarantee and family home to fall back on. And oh yes there are fine print penalty clauses in the factoring agreement for early termination!
My message is clear beware banks offering any help whatsoever and check out every agreement before signing and get relevant professional specialist advice every time. It may cost you a few hundred pounds but it’s better than potentially losing your business, your home. Banks are not trusted for good reason – don’t take my word for it, remember what the Barclays CEO said last month ‘it will take a decade to win back the trust of the public.’ He is not wrong.
The lesson is clear if you are in business, never, ever trust an outstretched hand from a bank in ‘friendship’ without seeing what is in the other had behind their back.
Be careful out there.
Written by: Mike Smith