In my last blog I mentioned ‘Managing Out’ and I’ve been asked what that means (sorry, its a reminder about use of ‘jargon’)
In times gone past if your bank had you as a ‘manage out’ case it meant that you had become a ‘problem’ – they expected to lose money as a result of you defaulting and they would naturally want you to bank somewhere else before that happened and would ‘encourage you’ to go. If that couldn’t be achieved you would be dealt with by an ‘intensive care’ unit – where a dogmatic approach to reducing your borrowing would either lead to the health of the business being restored – or its predicted demise.
Now however businesses can find themselves on a ‘manage out list’ when they haven’t defaulted or have any early symptoms of causing a problem – how can that be?
The reason may be that the bank are already losing money just by having your borrowing on the books. This comes about by the fact that since they lent you the money their’ costs of funds’ have genuinely gone up (as a result of central bank directives about putting money into capital reserves) and unless they had an adequate margin built in over ‘base rate’ or LIBOR’ (which were their ‘cost of funds’ when they lent) their net interest income will have been squeezed. Loans written at the most competitive times will have a negative return. How would you react if you had a customer who was losing your business money on daily basis?
You would assess the future potential of their business. The banks do that by looking at issues such as which ‘sector’ you are in and how could your business react to an increase in interest rates (their ‘stress test’).
Many investment property owners with bank borrowing find themselves under this scrutiny. If their portfolio comprises, for example, of retail outlets in secondary areas, the bank would be right in presuming that if interest rates increased you would either not be able to increase rents quick enough or your tenants would not be able to pay them.
This is when you may find your bank wanting you to fix rates – to protect all parties from interest rate rises. It may however be when you find your bank making the cold and harsh decision to lose your business, however it is able – perhaps regardless of your long association, how much income they have earned in the past or the amount of security cover they have for the loan.
How will you know if this is happening? It will become clear with a change in relationship manager (they will have a job title which gives a clue also) or the type of discussions that they bank are having with you.
What can you do about it? To some extent you should listen to the banks prophesy – it is usually soundly based although you may not agree that Armageddon is on its way!. You should also be co-operative – to argue and resist the bank out of principle could accelerate the process.
The trick is to manage the relationship with the bank rationally (whilst they are managing you) whilst looking at the market for other options. Many of the loans caught up in this are actually able to refinanced elsewhere – often by a specialist lender that is more relaxed than another bank would be about taking on a business that a competitor has ‘rejected’. Expect to have to pay more – which is why a search of the market is important. It is also not impossible to change the banks decision but that will require a strong case.