14 Jan Business Lending Update

By Ian Robinson

2019 will be a year for many that they will want to forget.  But only for those who are ill prepared.   For the rest, they will recognise, realise and convert opportunity into profitably commercial activity.  For the later, enrolment is restricted for those who undertake proclivity to this changing landscape.  Doing so will mean participating with an elite and discreet club of exceptional business owners, as they are more exception than the rule.

Sounds cliché, but we have seen firsthand evidence of it already through our dealings with lenders and commercial borrowers.  The world of banking has changed, and denial of such is a luxury reserved only for the valiant.

The banking and shadow banking sectors are rapidly recalibrating their lending criteria in response to a much-anticipated government report due to be released in February post Royal Commission.  By applying a principled based proactive approach, the financiers are trying to demonstrate that they are capable of self-regulating under a transparent and robust banking framework whilst apologising for their past indiscretions.  Too much too late is the creed.

Some lending policy has changed to a more conservative stance.  But with lenders just applying a hard-line approach towards their “interpretation” of the existing lending policy in the market and removing any allowance for subjective clarification, this act alone has created a tightening regime of material proportions.

For hundreds of years, banks have lent money based on declarations (and supporting evidence) made by the borrowers about their capability of repayment.  Hence, the onus to comply with the lending contractual arrangements have been made accountable by the borrowers.  This has allowed capital to flow from lenders to borrowers on a demand-pull capability basis.

The unintended consequences of the Royal Commission have flipped this legacy into a paradigm of “lender” beware.  We now have an environment where the accountability pendulum has swung back to the lender with funds being supplied on a discretionary highly regulated basis.  Therefore, a comprehensive business presentation to the banks is of paramount importance for borrowers.  Supply is now restricted, demand exceeds supply and the economy is held back.

At an individual borrowing level, capital restrictions will be crucial to any liquidity events within a business, creditors across the supply chain will naturally extend payment terms and financial “spot fires” and “grenades” will begin to ignite topical discussion within the commercial sector.

In response to tightening credit and increased costs of the Royal Commission, the banks pull their only remaining lever to protect profitability: interest rates.  By increasing interest rates on their “back book” (which means existing loans to borrowers), the banks heavily rely on the bulk of their customers being “lazy” borrowers who just accept their fate.  Only a very small percentage have the tenacity and will power to renegotiate their position with equal economic force to control their own financial fate and cost of capital.

This is not a note of despair, but one of strategy.  The “elite club” of astute business operators spearhead through these credit cycles with what seems like seamless efficiency.  And it is a simple case of not being caught in the hooks and barbs of those businesses that are not truly bank prepared.  There is no barrier to this club.  Size of the business is not the issue, it is the attitude towards executing the solution.

Remember, being bank prepared is not only good for healthy engagement with lenders, but it also provides a solid foundation for governance and insight into your business.