Dealing with your bank in the current crisis – top tips and what we have learned from the banking crisis.
With many businesses facing concern and uncertainty over cashflow in the coming months, reliance on finance from banks is going to be crucial for survival for many SME. MBM Commercial’s Dispute Resolution team have a long history of acting against large institutional lenders in matters relating to bank’s actions amid the 2008 recession, and remain the only firm ranked in Chambers for Banking Litigation in Scotland on the borrower side.
In recognition of this, financial institutions have recently put numerous measures in place to assist its customers during the coronavirus outbreak. These include capital repayment holidays and discretionary extensions of facilities, free of charge. However, we have learned from the 2008 recession that reliance on lenders gives power to lenders. Therefore, it is important to recognise that the current climate could result in harsher treatment of borrowers in the future.
Overdraft charges are set to skyrocket, and in some cases, quadruple from 10% to 40%. However, from 6 April 2020, FCA regulations will ensure that, in the interests of fairness, arranged and unarranged overdrafts are charged equally. (See our blog post: New FCA Measures to Relieve Customers Struggling with Repayments). Despite the base rate of the Bank of England being reduced to a record-low of 0.1%, financial products are now coming with increasingly exorbitant interest rates. However, the Royal Bank of Scotland is offering emergency fee-free loans and overdrafts to assist its customers who are struggling financially. It is hoped that other lenders will follow suit.
Personal guarantees are commonly insisted upon by banks to protect their position if a business fails, and allow them to recover the outstanding debt from the business owner. The Royal Bank of Scotland has announced that it will not be requiring personal guarantees from its customers, and the UK Government has declared that banks will not be allowed to take a guarantee over a borrower’s home. However, it will be possible for business (and other personal assets) to be secured, especially where the level of borrowing exceeds £250,000.
Where a customer has more than one business, the bank may require a cross-guarantee so that the assets of an otherwise profitable and thriving business are used to secure the borrowings to the company seeking the funding. In the event of default this can result in a domino like effect.
The new COVID-19 Business Interruption Loans (CBIL) scheme can provide facilities of up to £5 million to small businesses who are struggling financially. It is also available for start-up businesses. The scheme went live on 23 March 2020 and will run until September 2020. It allows applications for:
The UK government will underwrite 80% of the risk associated with debt, but the customer is responsible for the whole debt itself.
The heads of the main clearing banks have all expressed their 100% commitment to the scheme. However, the initial impression is that there is some delay in this commitment trickling down to individual bank managers.
Unfortunately, some profitable and solvent businesses have already been refused assistance from the scheme. This is not what either the government or the banks’ policy makers intended. This is especially concerning as that it is expected that 800,000 UK SMEs (one fifth of all UK SMEs) will collapse within weeks if they do not get access to the CBIL scheme. However, the position is changing daily, banks are coming under increasing pressure to comply with the scheme and their stated commitment to it, and any business who has been turned down in the early days of the scheme being announced should certainly reapply. The Chancellor has announced that, in response, the scheme will now be available to viable small businesses who are in financial difficulty as a result of the virus. It previously only benefited businesses who could routinely obtain commercial finance. Since 23 March 2020, around 1000 loans have been processed with a total value of £90 million. It might also be worth involving your local MP to assist in bringing pressure to bear on your bank if you are experiencing difficulty and it appears your branch or manager are not honouring the commitment to the scheme, and we too are happy to help with this.
The banks initially insisted on personal guarantees for these loans, but this has now become less common, especially for loans of £250,000 and less. For example, Lloyds had previously insisted on personal guarantees for loans above £250,000, but have now relaxed that requirement as it has now become out of step with other lenders. For loans of over £250,000, it is left to individual banks to decide how to administer the facilities and impose conditions.
Generally, the approach taken by banks has been variable. HSBC and Barclays have reportedly been supportive and proactive, but Natwest, RBS and Lloyds less so – although the position is changing daily so it is possible we may move towards a more harmonised approach. There seems to be confusion between the official government policy and banks’ own policies, so it is worth keeping a close eye on the financial press. The example given in relation to Lloyds shows that there is such a thing as “peer pressure” amongst the banks, all of whom will be desperate to come out of the crisis without their reputation being damaged, given their experience during the financial crash. If you have had conditions imposed upon you as a business which seem harsh or out of kilter with other lenders, make that point to your bank, and if need be speak to your MP. We are also happy to help you increase the pressure on your bank to re-think.
The recession of 2008 saw many banks fall into difficulty. As a result, financial institutions sought to increase recoveries from customers, and otherwise healthy businesses were rendered insolvent. As we did during the financial crash, MBM’s Dispute Resolution team continues to help its clients challenge the actions of banks during that period. Some top tips we learned duringthe financial crash in the work we did for clients, which are vital to follow to protect your business, and yourself, are as follows:
1. Protect your personal assets
Avoid personal guarantees where possible. Personal guarantees are a gateway to bankruptcy if you do not have the personal wealth to repay what is due to the bank.
If sequestrated, you could lose your family home, other assets and be professionally restricted, for example by being prevented from continuing as a director. Consider whether the risk is worth the reward.
2. Agree everything in writing
If you negotiate any change in terms with the bank, such as an interest rate freeze, always ensure that that agreement is followed up in writing, and that both parties have a mutual understanding of how the facility will now operate.
Without a written record, it is difficult to prove that the terms had changed. Changes in terms are often informally agreed in meetings with relationship managers, and the bank will not always follow up in writing to confirm what has been agreed. Clear contemporaneous notes should be taken of meetings and phone calls as these will be invaluable in the event of a dispute.
Your bank may not always be willing to commit an agreement in writing. A simple follow up email from you immediately after a meeting or telephone call to outline your understanding, and confirm what was agreed could save unlimited time, money, and even your business. By doing this, you place the ball firmly in the bank’s court to come back to say “no that’s not what we agreed”. Most banks will shy away from doing this and absent such a response your email will serve as good contemporaneous evidence of what has been agreed.
3. Read your covenants – and take independent legal advice if you’re unsure
Understanding your obligations under your facilities is the key to survival. You cannot follow the rules if you do not know the rules. If you are not sure how to interpret or comply with one of your covenants, take independent legal advice, and always do so before agreeing any new or renewed facilities.
Don’t assume that by keeping up repayments, you cannot be in default. Following the 2008 recession, loan covenants have become comparatively more onerous. You may have various ancillary non-financial obligations, such as producing management accounts, which must be adhered to. Failure to do so could render you in default of the loan agreement, and it could be called in, or have its terms amended.
4. Loan to Value pitfalls
Loan to Value (LTV) covenants are especially tricky. If that covenant is breached, it is likely that the bank can hold you in default and change the terms of the loan, or call it in. LTV covenants tend to stipulate that the amount outstanding under the loan must not be greater than a certain percentage of the property value.
Any decline in the property market poses a serious risk for breaches to occur. Halifax has already stopped all lending above 60% LTV and other lenders are withdrawing all mortgage products set at 80% LTV and above.
If your bank relies on a property valuation to hold you in default of a LTV covenant, you should always instruct an independent surveyor to carry out a separate valuation, as this could be a powerful negotiating tool if there is a difference in opinion between the experts.
MBM Commercial’s Dispute Resolution team can advise on all types of banking disputes and assist in dealing with specific matters relating to your loan agreements. If you need advice, call us on 0131 226 8200 or email DisputeResolution@mbmcommercial.co.uk.