Lessons from the financial crisis are still very relevant
21 November 2017
A decade has passed since the first signs of the financial crisis surfaced, although few who witnessed the run on Northern Rock on this side of the Atlantic or the downturn in the US sub-prime mortgage market could have predicted the enormity of the global turbulence which followed..
The banks and borrowers who navigated their way through those stormy waters are now considerably more robust as a result of their experience during the years which followed 2007/08.
While we could spend hours looking back or debating the possibility of another recession, it is clear many businesses also found opportunity in the middle of adversity.
It is my belief that we should remind ourselves of a number of the important lessons that have been learnt, and which can be applied by SMEs seeking funding today.
- Check your contract
- Understand your lender’s security requirements
- Is that guarantee really necessary?
- Banks are not the only source of funding
- Consult your professional advisors early in the process
The loan agreement (including any standard terms and conditions) is the borrower’s contract with the lender and, while the individuals operating a business will understand its funding requirements and the commercial terms which need to be negotiated with a lender, it is imperative that the loan agreement accurately reflects the terms agreed.
The borrower should take time (and professional advice, where necessary) to understand the nature, terms and implications of the loan agreement and keep these under review during the term of the loan.
Knowing what constitutes an event of default may be crucial, for example, and any significant changes affecting the borrower’s business or assets may require the lender’s consent in writing during the term of the loan.
These requirements will be set out in the loan agreement and show how the lender intends to secure or guarantee the repayment of its loan, so a borrower should take time to consider the different types of security and guarantees sought before signing the loan agreement.
The days of security over property providing the only means of recourse are long gone, and lenders are likely to seek security over various assets, revenues and contracts (as well as guarantees from key individuals or group companies) after due diligence to establish where the value lies in the business.
Even before any event of default arises, such security is likely to place restrictions on the use and disposal of the borrower’s assets (and potentially on the manner in which the business itself is operated) which must be balanced against the return.
Guarantees have become a key requirement for many lenders, where once they might have been an “add-on” or even an afterthought.
Before agreeing to provide any guarantee, however, a borrower should check that, firstly,the guarantor (who is often a third party) is willing to enter into such an arrangement with the lender, and secondly, the guarantee sought is proportionate, carries the appropriate commercial benefit and does not expose the guarantor to unnecessary risk.
There are many types of guarantee but - for obvious reasons - personal guarantees tend to make the headlines, particularly where court cases involving prominent individuals or those claiming that they did not understand what they were signing are involved.
While traditional and established banks remain open for business, lending appetites vary and many have understandably become risk-averse.
A number of new lenders have entered the Northern Irish market who are willing to step into the space where traditional banks cannot tread, and provide many borrowers with viable and interesting alternatives.
In recent years, we have witnessed increased activity by mezzanine funders, challenger banks, peer-to-peer lenders and crowdfunding initiatives, and Belfast has a broad range of corporate finance specialists who can match business needs with suitable funding products.
Private equity and the Growth Loan Fund have also provided stimuli for SME growth, and many of the traditional banks are willing to work in conjunction with such initiatives.
It still comes as a surprise to us when a borrower signs a loan agreement without first having it reviewed by a solicitor or financial advisor, or without knowing, for example, the practical distinction between a debenture and a charge over property.
At that stage, the horse has already bolted and the borrower may find it difficult to negotiate any meaningful changes with the lender.
If in doubt, ask the question – solicitors will be happy tailor our review of any loan, security and guarantee documentation to suit the borrower’s needs and budget, and if we cannot answer your question we can point you in the right direction using our extensive network of professional contacts across Ireland, the UK and beyond.
Those contacts might also be able to suggest alternative or additional sources of funding, so an hour or two spent engaging with professional advisors now could save a lot of time and money at a later stage.
The financial crisis is behind us. Following some of the above steps can help us keep it there.