Real signs of a downturn?

Im often asked my opinion on the state of the economy based on my experiences with clients seeking financing. Financing can of course be sourced for poistive as well as negaive enquiries but the biggest difficulty is that even the largest brokering firm is only ever looking at a small sample. Its near enough impossible to call

There are however certain trends that may give indications and these are not all directly attributable to the brokering experience.

My current experiences are picking up more businesses struggling rather than prospering and there is a slight sense of negativity in the air. This might be something or nothing but on my movements across my patch I have noticed one trend which may or may not be significant.

I use a high profile market leading office rental group’s business lounges. Maybe they are not competing as well as they could be but i am seeing more and more vacant space within their offices than ever before. One high profile destination was virtually deserted when I visited a couple of weeks back

These are the locations from which many small businesses start and build and if it is a trend, it could be a worrying one

Easy Brokering? All about data?

As more and more data is stored and more is assumed to be available then the drive to assume that its the easy answer to financial choices increases. A number of new enterprises are offering online “brokering” services based on what they claim are the lenders criteria. The latest example claims to direct accountancy firms to the “correct lenders” based on criteria they supply

All sounds quite logical but is frankly nonsense. Im not here to trash other products but data is only as good as what is disclosed by those responsible for supplying the facts.

Broadly lenders will details certain benchmarks but these are very very broad outlines. The most common outline would be maximum and minimum lends but even that can be flexible depending on the overall profile of the prospect.

And thats the key. No lender wants to dismiss prospects out of hand so naturally they keep the criteria vague. And rightly so. They are also wary of commiting to benchmarks. Again, rightly so. Lenders will resist disclosing negatives and that undermimes any supposed market analysis.

Underwriting and brokering depends on a many many wider factors than pure numbers.  To give just one factor, understanding and knowing the client and their prospects is crucial (arguably the most significant element) and that cannot be entered onto any spreadsheet.

The personal knowledgable approach cannot and will never be beaten.

Taking credit ratings at face value. Not good enough

I am currently discussing an invoice financing lead with a number of lenders. The deal is dependent on the credit worthiness of their two largest clients and we need to achieve a decent level of cover before entering into an arrangement

Naturally the starting point is whether the lender will back these two debtors. Both are reasonably substantial but with minor issues and the responses have been a real mix.

So whats the problem?

Credit decisions are a combination of many factors. Commerical credit managers will take all these factors and way up their final view. What they will not do is simply take an agencies rating and stick blindly to it.

Why? Because with a couple of honourable excpetions, the agencies are simply working off last filed accounts ratios, which as any credit manager will tell you, is absurd. This is especially true of one particular budget agency which I have highlighted on this blog before

So it was particularly disappointing to find a handful of lenders come back and simply dismiss the proposal because the agency rated the debtors as “nil”. Conversely, it was also interesting to note a couple of lenders come back with thorough evaluations from their underwriters.

Any idiot can give a “computer says no answer”and as a  broker, I expect lenders to actually make a little effort with their responses and research

 

 

Afraid of competition?

Last week,  I let slip to a lender that a loan that I was seeking for a client was being looked at by around half a dozen lenders. Their response was

“we do not look at loans along side other lenders. Its not one for us”

Really?

Imagine a brick layer telling a main contractor that they do not wish to be considered if there are others pitching for the work? Or a ad agency demanding that they are the only agency that should pitch for a campaign?

What is it with finance? Of course not all lenders behave with the attitude that im representing their interests and not my clients but its still an occasional attitude. Not one I will tolerate

The people concerned should perhaps be a little more flexible and wise in the future.

A current overview of PTP lending

This is an interesting piece in the Telegraph but maybe a few of the comments could be questioned

The simple idea was that the lower costs of running a P2P platform would result in cheaper interest rates for borrowers and higher returns for investors – a win-win.

I do not believe anyone expected cheaper rates for borrowers through PTP lending. That was never the true business model (despute Funding Circle’s laughable headline figures in their tv ads). The key was speed and convenience. The established banks have frequently been deeply unhelpful and painfully slow with business lending. The example of the near invisible EFG loans could be cited

In a trading update ( Funding Circle), it was revealed that the proportion of bad debts – money lent through the platform which it does not believe the borrower will ever repay – had risen from 1.3pc in 2013 to as high as 4.4pc last year.

Thats very very high and im surprised at the jump in the number. To me that is not adequately explained by economic conditions (which have been benign) and there is a suspicion in my mind that maybe the previous figure was lower than it should have been ? Bad debts can be ascertained and confirmed at any stage in a cycle. Alternatively they might have been hit by one or two significant bad debts, but that would surprise me given that their business model is one of numerous smaller loans

In the case of Lendy, more than half of all its loans were in arrears when it entered administration at the end of May – in some cases borrowers were more than three years overdue. The effectiveness of the debt recovery processes used in the sector has also been called into question.

Blimey

 

 

 

More opinions on Funding Circle

 

The Guardian unsurprisingly highlight Brexit and Trump’s “trade wars” as a factor but further down in the piece is this sober analysis

Colin Jackson, an analyst at Goodbody, a stockbroker, said Funding Circle’s revenue downgrade was “disappointing” but “not entirely surprising in our view, as the ambitious growth targets set out at the initial public offering were always going to be difficult to hit while also maintaining a firm grip on asset quality.”

With losses reported of £48m in 2018. its clear that they were banking on huge growth to reach profitability.

City AM highlight the test that investors must overcome to invest in PTP lenders

Perhaps the most cutting analysis comes from Investors Chronicle. Worth quoting in full

Continuing its woeful start to life in public markets, peer-to-peer marketplace Funding Circle (FCL) used a first half trading update to downgrade full-year revenue projections by half to just 20 per cent. The group blamed an “increasing uncertain economic outlook” for reducing demand for loans, though it acknowledged it had also tightened lending criteria to higher risk businesses, a move it said would impact origination volumes but protect net returns for investors on its platform. There’s no sign of the pathway to profitability, either. All Funding Circle could offer was an expectation that the adjusted losses before interest, tax, depreciation and amortisation would be at a lower margin than 2018. The shares, which were falling steadily over the past week before crashing 20 per cent today, are under review.

The clear reading of this is that “improved returns for investors” from “tightened lending criteria” rather indicates more bad debts than they would have wished for

 

 

My piece on Peer to Peer lenders

To be published by a well regarded firm of accountants

Recently there has been a degree of negative publicity surrounding peer to peer lenders. With one high profile failure and the well publicised struggles of another leading player, many would be forgiven for believing this segment of the market is heading for a fall. in fact , the truth is a lot more complicated

Many in the sector of traditional lending will be eager to tell you this is precisely the expected outcome and that the peer to peer model is unsustainable. Well reported comments from the former city regulator Lord Adair Turner fueled the fire but understandably many will retort that the traditional banks have hardly been a paragon of prudence and good management over the past couple of decades. Some might come out with a even stronger response

There is often little love lost between the two sectors but both should acknowledge that each has learnt from each other. Speed of execution and customer service from the peer to peers whilst aspects of traditional lending (meeting clients, tempering the reliance on algorithms) are increasingly being incorporated by the PTP lenders.

For brokers committed to servicing their clients, the additional options are greatly welcomed. As well as adding to the alternatives within the current product range , many new products have been added. There are myriad options and a constant desire to find gaps in the market. Aside from straightforward PTP loans, we would suggest that the two most significant changes are Single invoice lending and Working capital lending

Single Invoice is quite simply invoice financing against one invoice at a time. The benefit of this is that the borrower is not locked into a contract. The downside is the cost but this is mitigated when the use of they facility is occasional and brief. Flexibility suits many borrowers who can be prepared to accept a premium when they are not feeling beholden to a contract. Frequently there is also less insistence on the dreaded Personal Guarantees. A typical client will be a production company committed to a specific large project for a blue chip client where there is a concentration of resources as well as a pressure on cash flow

Working Capital Lending is a relatively new development and a very welcome entrant into the market. Here the lender looks at the overall balance sheet and will take into account previously unconsidered factors such as Work in Progress. this goes the lender flexibility to go a little further than invoice finance lenders who are constrained by the actual invoicing. to give examples, it is a form of lending which has proved suitable for Accountancy firms and Advertising Agencies.

Going back to recent events, many will be wondering what the outcome would be if they had taken borrowing from a lender that subsequently went into liquidation. Some might be hoping that this would discharge them of responsibilities to repay and sadly that will not be the case but the other side of the coin is that little will change for the borrower. The ‘lending book’ will either continue under administration or be taken over by a new lender. The terms are unlikely to change

And we should welcome change and competition. Many UK businesses complain that they cannot find the lending they require but its more often simply the case that they haven’t quite looked in the right places. The market is a lot broader than they imagine and compared with most markets, far more flexible

Funding Circle. Schadenfreude?

You may or may not recall my piece reagrding Funding Circles attitude towards brokers whereby they “delisted” brokers with whom they hadnt completed a deal within a certin period and insisted that they go through their own “broker” and thus share the commission. That produced many two word replies from many across the market.

They also apparently acted in a high handed manner towards their investors by refusing to detail exactly which loans their cash was being aloocated to. You would think that was a common courtesy?

Many in the market think the FC initials are entirely appropriate and Ive not known a lender attract so much hostility. Yes they quickly commandeered a large market share but unlike Marketinvoice in the PTP invoice financing sector, they seem to have seemingly acted with unbearable arrogance.

Now it appears that all is not well  and there is more than a hint that they have incurred some significant bad debts. They also greatly need to grow the business to cover the overheads. A quick look at their accounts would not (lets put this politiely) entice a lender to lend to Funding Circle.

But do i take pleasure in this? Not on behalf of the staff that I met,  who were really engaging to deal with and not on behalf on the industry

Too many “traditional” lenders will be rubbing their hands at the potential collapse of a major peer to peer player and their have been some recent examples such as Lendy but they need to also realise that this market is here to stay and whilst there will naturally be some fall out and many mistakes, the PTP lenders have significantly filled a huge gap left by the failures or the big four banks.

And of course, it doesnt require reminding that mostly they have a catalogue of catastrprohic failure behind them.