Banks; Friend, or Foe to SME's?

Having read over the weekend of yet another breaking banking scandal is it not about time these disgraceful fat-cats were seriously taken to task? As a company turnaround consultant I come into contact with the shameful banking practices on a frequent basis. This latest ‘revelation’ headlining the newspapers is not news to those of us in the insolvency business as there have been suspicions for years around the insolvency practices and banks. A lot has to do with the banking culture itself which has become more and more arrogant and remote from its original purpose – to lend and provide services to its customers.

Successive governments have had far too close a relationship with the banking heads. The most notoriously bad banking and political relationship was of course between Fred Goodwin, ex RBS boss and Gordon Brown, who has arguably been deemed "the worst chancellor ever".

Gordon Brown appointed Goodwin of all people to advise on the regulatory aspects of banking and sale practices and duly gave good old Fred a knighthood in gratitude. The appointment of Goodwin advising Gordon on banking regulation was not so much the blind leading the blind, as the equivalent of King Herod being asked to advise Mothercare on the latest range of comforters. It should not, therefore, come as any surprise that on top of the rate swap mis-selling debacle we now have this latest, equally shameful list of accusations against RBS of stealing property at an undervalue.

We come into contact with situations like this through our line of work and one example could be a recent case where a director was sold ‘insurance’ to cover his company against rising interest rates until, you guessed it, the interest rates fell and his cash-flow was destroyed. This was an interest rate swap product and even though he complained, he got nowhere with the bank and eventually the company went into default with his mortgage payments – the actual mortgage he had ‘insured’ and trying to protect.

The director had secured a RICS valuation for over £2m and yet, just one year later when the company, now starved of cash due to the horrendous interest rate payments he was paying to the bank, was forced into company liquidation. The bank appointed liquidators then sold the property off at a value of £800,000 knowing that my client had personal guarantees in place further protecting the bank. He not only lost his business but also his wife, having long suffered the pressures of supporting a stressed husband, she had finally had enough. He also lost his children and immediate access to those that made his life worthwhile. All this because greedy individuals looked after their own interests first and believed they had the right to do what they could with no thought that they may be doing wrong. But these ‘scams’ do not only involve bankers, they drag in the associated large insolvency practitioners who sit on the banking ‘panels’ as they may have too cosy a relationship with the banks. This may be another area for investigation by Vince Cable who appears to me to be one of the few politicians with any sense of integrity. 

Of course the newspapers rightly focus on the lost businesses and the hardship that this causes, but what it also does is knock our confidence in the established banks and the establishment itself to an extent. It is hardly surprising why banks are so despised; try getting a commercial loan, or worse a mortgage and the banks get tighten-up. Any mortgage applicant is treated like a criminal as they have the audacity to dare borrow money to improve their lot. 

Of course this would be funny if there wasn’t a more serious side to it and the serious side is the human fall-out of the pressure that these scandalous banking practices bring about. The fact that the Co Op Bank, set up to serve its members has been brought to its knees with £1.5billion gap means pensions will be underfunded and genuine investors will lose money. 

The banks have a lot to answer for and there does not seem to be any end to these banking scandals that have hit every man woman and child in this country and arguably the western world. The bigger question is what do we do to put this right? 

Written by: Mike Smith

Where to Turn for Business Advice?

Most people in business will have suffered a sleepless night or two when cash-flow problems loom, but where do business people turn to when they need someone to help? Loved ones are usually out of the question as they will inevitably have been contaminated by the emotion of the situation anyway. The old days are gone when you could sit down and talk to your local branch manager who knew you well and had the authority to make the decision for you. Nowadays, you are more likely to be sold something completely worthless by a ‘relationship’ manager who is probably too young to even have had one – a relationship that is. The Citizens Advice Bureau are not in a position to advise if you mention the word business and debts in the same sentence and besides, they are becoming few and far between as government cuts dig deeper.

A religious belief of some kind can provide someone who simply listens, but you are unlikely to see a burning bush, or have a revelation that indicates a way forward.

It seems that the internet has been the saviour of some who are able enough to switch on the laptop and search for help. Certainly we get our share of truly dreadful and often heart breaking accounts of how someone has found themselves in difficulty.

Despite what most believe, business people in trouble are not all directors shirking their responsibilities, though it is easy to see why it may appear so when you are a creditor and a company that owes you money enters company liquidation. From experience usually around 20% are forced to close through an outside unforeseeable incident such as stroke, heart attack, sudden death, or the impact of a family death, or long term illness. A further 30% are often guilty of no more than putting too much faith in a particular project, or company, and OK it may be mismanagement, or simple inexperience, but we all have to learn.  Making mistakes whilst learning can be a very expensive way to learn, so this should be avoided at all costs – consult a professional.

For most small businesses they may turn to their accountant, but this is hardly fair on them as in most cases they will see a client once or twice a year if they are lucky. The medium sized companies may have an in-house bookkeeper/accountant, but they will be too close to the problem and unfortunately in my experience usually, unfairly, carry some or all of the blame for the company predicament. If you are a sole trader or a partner in business it is likely that the first person you speak to is either your life partner, and or business partner. Either is a mistake and often leads to the ‘blame game’ which in turn applies negative pressure on the relationship. It is a sad fact of life that around 60% of those contacting us will be separated, divorced or splitting up. We sometimes forget the impact on families business stress can have.  

If the business is not viable and you are a sole trader then there is no difference between personal and business debts. It is not better, as was suggested by a recent client that; ‘if you are a partnership then your debts are halved aren’t they?’ The answer is it is not as simple as that and it can be worse in some cases where, as is usual, one partner has no assets and the other has lots. Unless you have a limited liability partnership and or a legally binding partnership agreement then the debts will be joint and several. So if your partner is about to sign a contract for a new BMW on the partnership business account you may want to hold back the signature as you could end up paying for it if things go badly.

You would think directors would do better when the company has limited liability? Not so, as banks and suppliers obtain more personal guarantees and security for provision of supplies or lending. Unfortunately if the company does end up in liquidation the insolvency practitioner is not allowed to help the director by regulation. If you think about it this makes sense as the insolvency practitioner acts in the best interests of the creditors not directors. Whilst an insolvency practitioner must have due care for a director with a personal guarantee they cannot give direct advice on the personal guarantee when acting for the bank as this is a clear conflict of interests. Of course the biggest taboo subject for an insolvency practitioner and guaranteed to make him/her to go pale prior to being engaged is the subject of an overdrawn directors' loan account. In liquidation, this can have very serious personal implications for any director and the insolvency practitioner will be duty bound to pursue these on behalf of the creditors, even to the point of bankruptcy. Remember who the ‘practitioner’ is acting for? This situation should be discussed in detail if an insolvent liquidation is being considered as a potential solution. There are unscrupulous ‘practitioners’ who are well known in the business who will actively seek out naïve directors seeking a ‘liquidation bargain’ and thinking that they are being adept by obtaining the cheapest liquidation on the internet, the truth is this could not be further from the truth. If a liquidation fee seems too good to be true then it probably is and there will only be one loser.

If a liquidation is being recommended to you as a solution ask direct questions and get straight answers and if need be get confirmation in writing as to what the process will be, before, during and after liquidation. If in doubt, ask to speak to past clients and check for testimonials on the ‘practitioners’ website. If a director entering into liquidation does not perform these very simple checks then they do so at their peril.  Just as the internet can be a saviour it can also be a dangerous place too.

Your accountant may know someone who will not simply and automatically think of liquidation as the first port of call and if you have seen previous blogs you will know this is unlikely to be a modern insolvency practitioner. You knew I was going to say "seek out a business turnaround consultant", but I genuinely think this is the best option in today's business climate. They are used to working in high pressure and insolvent environments and if they are any good they will provide initial free advice and even solutions for you.

Whether you are a director, sole trader, or a partner, if you are having severe cash-flow problems and you are worried about your personal situation you should be speaking to someone who looks after your interests whilst having due care for the creditors? Someone who is well used to negotiating with creditors and someone who has earned their stripes through having managed many businesses, gaining hard business experience. Doesn’t that make more sense? Do yourself a favour and seek out a business turnaround consultant, you can learn more here at the Turnaround Management Association http://www.tma-uk.org/.