RiSk aSSeSSment It’s fair to say that some
agents don’t have a natural affinity with risk assessment.
says, “The problem with an estate agency, though otherwise it might be a good business, is they have no collateral.” That often means managers being asked to put their personal assets up as security. In Robert Nichols’ experience, banks
often want personal security below the £1m ‘small business’ threshold – less so above that – or for mature businesses. But he comments, “If you’re not going to be asked to put up your house as security, it needs to be the kind of business where if the owner keels over, it would still be viable.” Even above that limit, banks may insist on key man insurance – an issue which came up when sourcing finance for Edmund Cude.
Skinning the cat
However, Graham McKean says, there are various other ways round the problem. For instance, there’s the Enterprise Finance Guarantee scheme, which was “specifically designed for when there’s a lack of security.” Though it’s fair to note that with an estimated £2bn lending over the next four years, the EFG is a relatively small tranche of SME lending. And he says, at Lloyds, “We look at each
case on its merits and take a view on how much we would lend on an unsecured basis, and yes, we do do that,” contrary to some perceptions. Firms which are having a tough time
getting finance from their bank might have structural issues. But equally, Mike Conroy says, they might try another bank. He explains that “different banks have different appetites, and different cost of capital. Some banks might have a greater desire to lend in certain sectors than others; that’s largely due to their balance sheet. No bank wants to put all its eggs in one basket, so from time to time they may pull back on lending to one sector, to rebalance.” A refusal to lend therefore doesn’t always reflect on the quality of the business proposition. It may simply be the case that
48 JANUARY 2012 PROPERTYdrum
the bank already has a high volume of lending in the sector. Banks remain highly selective in the type of business they want to finance, though. Mike Conroy describes the ideal agency from his point of view; “strong local players with a good service, with low turnover of staff, who believe they can open a new office.” But even then, he says, “They have to make a case; they have to demonstrate that they understand the target market.” Recurring income also helps de-risk an
agency business. “You’re more likely to get a positive response if you have a big lettings
Bankers tend to have a quite different mindset from estate agents. Mike Conroy says “Banks are low risk, low return finance providers, they’re not equity takers.” On the other hand estate agents are “optimistic by nature”, driven by the opportunity to make large profits, rather than small but certain margins. Graham McKean says wryly, “It’s fair to say some estate agents don’t have a natural affinity with risk assessment.” Banks are concerned not so much by the
interest rate they can charge, as by the probability of default. So while an estate agent prefers the business plan with the most profit, the bank simply wants to know that the business will make enough money to pay the interest on its debt. A good business plan is crucial to any
credit application. It needs to show good understanding of the local market, and a strategy for growth, but Graham McKean says it also needs to cover a number of other areas that are often omitted. “We look at where they are now, a
lettings business might have lots of property expertise but maybe not the right experienced person on the financial side.” In particular, with lettings agents, he says that “We need to have the comfort that they’ve got a handle on the management of client accounts, because that’s an area that needs very careful management.” He expects the plan to talk about internal processes and IT, as well as membership of bodies such as RICS, ARLA or NAEA. He also says too many business plans
The Small Business Loan Scheme looked good, but no-one at the bank knew
anything about it.’ ROBeRt nichOLS edmund cude
business,” comments Ed Meade. And estate agents who already have
substantial levels of debt may find they are in for a tough time. Mike Conroy explains. “What banks are twitchy about at the moment is high levels of leverage, and the amount of debt they give to any one business.” He points out, too, that firms which want to borrow need to manage their bank account properly.” Your credit rating with your bank is changing on a daily basis, and if you’re over your overdraft limit, that will affect your chances of getting finance.”
don’t contain a contingency plan, or enough depth and clarity on the business strategy. “Too often we see something that says ‘property prices will only go up’.” Most agents that are currently expanding
are doing so through acquisition. Mike Conroy says the risk is lower; “you have something to work with, whether it’s a merger or a buyout. They have trained staff, a High Street location, it’s a question of scale, you’re not replicating all the senior management, so there are some costs you can lose.” But it still needs to have a solid business case, and that business case will be looked at very critically indeed. Though finance is still there, for those agents brave enough to expand, it’s clear that banks are increasingly cautious – and they’re doing their due diligence extremely carefully. That said, some banks are lending to this sector and, to some extent, specialising, so agents may want to shop around.
Do you have any views to share?
www.propertydrum.com/articles/financeJan12
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