Entrepreneurs should avoid over exposure to a single bank as lending tightens
JOHANNESBURG - According to lending specialist, Paragon Lending Solutions, there has been a marked increase in overdraft facilities either being reduced, or called in, over the last few months as traditional lenders tighten requirements for business loans.
Gary Palmer, CEO of Paragon, said, “I have spoken to a number of clients recently who have approached us to raise funds for them after their banks have, often without sufficient warning, called in their overdrafts. Other clients have tried to make changes to their facility only to have the financier increase their repayment rate on the existing deal.”
He says the company had also heard from a client whose primary bank contacted them to say they would be incrementally reducing their facility over the coming months when there had been no change in the performance of the business.
Palmer says this is a result of banks shifting their preferred client or industry profile.
“Some companies have been hit by this trend after banks try to reduce their exposure to sectors which they believe aren’t performing well. Unfortunately, banks have the contractual right to do this, although it is often done regardless of the quality of individual businesses and it can cause significant financial strain for otherwise stable companies,” he explains.
Palmer says local banks are being forced to focus on margins because there are fewer deals in the current market. As a result, they are increasing interest rates to reach their targets.
He says companies should, now more than ever, not be over exposed to one financial institution.
“Many banks and other traditional lenders will offer you better rates if you bring all your business to them. This is a big risk and we believe individuals and businesses should multi-bank. Having a primary banker for your business is still good, but you should also have accounts and products with other banks as well.”
Palmer says it’s worth noting that there are certain instances when banks look after their clients: “We have seen examples where existing clients have been offered excellent rates. In this particular instance, our client was dealing with the bank who held their business account and had done repeat forex deals with the bank. It’s important not to assume that this will always be the case. If your bank knows you are shopping around, they are much more likely to make an effort to be competitive so as to keep your business.”
Palmer gives another example saying, “In another instance a client who owns commercial property as well as another operating business tried to settle the mortgage of a property he had just sold. He was surprised when the bank asked for R4 million over the outstanding exposure amount on the property. This was because his other property mortgages and operating business overdraft were linked to that property. It’s worth remembering that if you have an issue with one business, the banks may want to reduce their exposure across your portfolio. This is a good example of why you shouldn’t have all your eggs in one basket.”
Palmer believes personal relationships can still make a difference.
“We advise clients to meet with their business bankers once a quarter and keep them up to speed with what is happening in their business and their sectors. The banks still offer the cheapest money and they are fueling the economy. However, just like banks like to spread their risk, business owners should not become overly reliant on one institution either,” Palmer concluded.
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