Banks often talk about a loyal customer relationships, but their definition of loyalty may be very different to yours.
I’m constantly surprised at how many customers fall into the loyalty trap with their banks when trying to attain Commercial Finance.
I’m sure the average Joe Blow would define loyalty as an unfaltering relationship between parties through good times and bad and would think that the core ethos to a strong relationship would be openness and honesty.
But these are very difficult values to hold onto when you have profits on the line, shareholders demanding steady , “higher returns”, and Bank Managers with “bonuses” dependant on a combination of “profits” and a “strong performing loan books”. “Higher returns”, “Bonuses”, “Profits” and ‘Strong Performing Loan Books” are all negatively impacted by late or problem loans and this is why your Loyalty may mean very little to your bank should you ever need to call on it.
Consider this :
- Bank manages are assigned the difficult task of managing customer relationships, and lending out as much money as they can, in as prudent fashion possible. These managers are trained in lending money but have very little experience in managing a customer during hardship. Actually, managing an average of 80 – 100 customers each, most Bank managers don’t have the time to manage and grow their own books , and attend to their best performing clients, let alone enough time and the resources to manage, advise and assist customers who are experiencing difficulties. In reality, customers who are having trouble meeting their obligations become a real burden to their Bank Managers as they require more time and more resources by way of phone calls, meetings, and extra financial information, updates etc and overall, an extra level over-seeing than most Managers can afford. The best result for the Bank Manager is to have that loan transferred to another department where they specialise in problem loans. From this point on, it becomes someone else’s problem and the they can get on with managing their portfolio and meeting their targets and achieving that bonus.
- When loans go sour, Banks are forced to provision for the probability of a loss being incurred against that loan. This provision essentially requires the bank to place capital aside. The economic cost here is that Banks are setting aside capital that could otherwise be used to invest in more loans, investments etc. This impacts a Banks bottom line and it is vital that banks keep their provisioning as low as possible, to increase their return on capital. Obviously once a Bank is forced to allocate capital aside for a problem loan, there is a huge incentive for them to have that loan dealt with in the swiftest possible manner,
- Banks main incentive for lending you money is for higher profits and higher returns to their shareholders. This is at the core of every decision they make. As mentioned, bad debts cost the banks money, as bad debts use up resources that could otherwise be used in more profitable areas.
- Banks offer the majority of credit on secured terms. When times get tough, banks more often than not, have an exit strategy in place via the liquidation of their security. I have seen friends; family and long term partnerships quickly turn ugly at the first sign of a business slump. So if friends and family “jump ship” at the early signs of difficulty (normally incurring an economic cost in the process) why would a bank stick around, especially when they are able to have their capital returned through the sale of their collateral security?
The more I think about it, the more I believe it is impossible for a bank to really reciprocate loyalty to their customers and work with their clients during real tough times. When taken in the context of a cost vs benefit analysis, it simply doesn’t make economic sense.
When using debt to fund expansion or wealth generation, it is vital that you conduct your own credit risk analysis, just like the bank does and this means looking beyond simply comparing interest rates.
There are ways to structure your debts so that in difficult times, you have more flexibility and greater access to capital when you most need it. The right strategy could be the difference between being able to successfully trade out of a difficult period, or, being held at a stalemate while your bank determines how and when it will liquidate your assets to recoup its money.
At Folio Finance we have a key strategy in place specifically for our business clients. It is the ultimate asset protection strategy and offers the most flexibility , with a key focus on asset protection, whilst at the same time protecting and maximizing your Credit Score.
In short, the structure focuses on the following key areas:
- Hold only your trading/cheque book account with a major bank. They have the largest branch networks in Australia and offer the most flexible access to those accounts when you need them. They also are safe institutions to hold your money with and have the most advanced internet banking systems.
- If your business requires an overdraft of <$100k, aim to structure this on an “unsecured basis” where possible, or have it secured by cash only. Sure you may pay a higher rate for the benefit, but it really is crazy to have a small account like this tying up equity in a property.
- Have your home loans structured on a standalone basis away from your business debts. This will almost always entail using a lender outside of where you hold your trading account. There really is no advantage to allowing your home loan/investment loan lender, access to your trading account and this can create all sorts of issues during difficult times ie. when many Australians require access to their equity to fund their operation. If your trading accounts aren’t in great shape, your bank will be reluctant to lend you more capital, regardless of the amount of equity you have in your property.
- Hold all your Commercial Property loans with Non Bank Commercial Property Lenders. There are many advantages to having your Commercial Property Loans with Non Bank Lenders. The three main advantages are :
i) Banks provide commercial loans on shorter terms, generally 3 – 5 years. At the end of each loan term, customers are required to have their property revalued incurring further costs. Should the valuation come in short (some commercial property valuations have been up to 15% lower this year) then the bank will ask for more security or for more capital to be contributed, in order to reduce your loan back into the bank’s lending parameters. If you aren’t in a position to reduce your loan balance, then you are in default of your lending contract with the bank. This will result in the bank forcing you to refinance, or worst case, taking possession of your property
ii) At the end of each year, banks require their Commercial Clients to complete an annual review. These reviews require clients to provide up to date financials each year which are then assessed against the bank’s lending parameters to ensure that you still meet their Lending policy requirements. Regardless of whether you have paid your facility on time, a decrease in your business/companies performance can result in a Default on your loan contract forcing you to refinance your loan even before the loan term has expired.
iii) Through the valuation process (i above) or the annual review process (ii above), YOU CAN BE IN DEFAULT OF YOUR LOAN OBLIGATIONS WITHOUT EVER MISSING A REPAYMENT.
iv) Non Bank commercial lenders offer flexible interest only terms and offer commercial property loans over longer periods, of up to 25 years with no annual reviews. This factor alone is a huge advantage and one that shouldn’t be overlooked, particularly if you are a Company that experiences lumpy or cyclical cash flow.
v) Non bank commercial lenders offer higher lending ratios than the main stream banks. This results in less capital being tied into the actual property freeing up more of your cash for working capital.
Bottom line is that banks are loyal to only one segment of the market and that’s their shareholders. By using multiple lenders, borrowers can diversify their own credit risk, and keep their banks honest.
By following our recommended strategy above, Borrowers’, will experience fewer barriers to accessing their equity meaning you won’t have to approach the bank “cap in hand” at a point in your business cycle, when you are most vulnerable.
Don’t fall into the trap of having all your eggs in one basket, as ultimately you will end up having to work with a bank, during a time when their interests may not necessarily be aligned with your own.
Con Katsiouras – Folio Finance