13 Feb Entrepreneurs should avoid over exposure to a single bank as lending tightens
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.
“I have spoken to a number of clients recently who have approached us to raise funds for them after their banks have, often without warning, called in their overdrafts,” says Gary Palmer, CEO of Paragon. “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 profile.
“Some companies have been hit by this trend after banks try 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.”
However, Palmer says personal relationships can still make a difference.
“We also 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 concludes.