Latest Newsletter From the Construction Team
When the crunch comes
With tough times forecast for 2008, will banks be changing their credit criteria? - Not necessarily
When tough times are predicted, and the potential knock-on effects of the credit crunch are felt, it might also seem reasonable to assume that borrowings will be affected.
Suddenly, and at a time when investment funds might really be needed, it seems they will no longer be there. It’s raining, so the story goes, and therefore umbrellas are being withdrawn from sale.
In fact, that assumption would not be right. There is no denying that the rules change in tougher times, but that does not mean that facilities are withdrawn completely.
It might help to understand the context in which we bankers operate. Most people are aware of the Bank of England base rate: it is the headline figure, the yardstick for the news as well as for business and economic analysis. However, the cost of funds for business banks are pegged to another rate altogether – the London InterBank Offer Rate, or LIBOR, as it is known. As I write this, 3 month LIBOR currently stands at 5.84%, against a base rate of 5.25%. This means that most banks feel they have to lend, particularly on larger deals, at more than one and a half per cent over base in order to make an acceptable margin over their own LIBOR commitment.
This is an important point to bear in mind when seeking a borrowing.
Banks are not cynically making big margins on the base rate; they are rather making modest margins on their own borrowing, represented by LIBOR.
Borrowers might also find that gearing is reduced – in other words, that banks are offering smaller proportions of the asset value needed – and that banks are being a little more selective about the propositions being put to them. But none of this means that drawbridges are being entirely raised. The ground-rules may have changed in recent months, and continue to change this year, but opportunities are still there. Those seeking facilities should be seeking banks with a solid asset base of their own, who are better able to ride out choppy waters.
Of course, good times or tougher times, banking is not just about borrowing. Clients should expect more of their banks than this. Banks offer a wide range of financial products and clients should take advantage of them.
For instance, clients with funds that can be placed on deposit would do well to consider talking to a bank with a decent treasury department. It is about favourable rates, yes, but it is not just about that. We find, in areas like these, that clients want not just a lucrative deal but a flexible one – and they want a deal with someone who regards them and their needs individually, rather than as mere account numbers.
A good Bank will pride itself on the relationships it develops with its customers – relationships that are not solely dependent on loans. Customers have learned to expect a standard additional feature: honest, practical, impartial understanding and interest in the day-to-day running of their financial affairs. Their bankers should give support to them in international trade, in foreign currency transactions, in electronic banking, in treasury management, in other business deposits, in business credit card facilities, in investment products and services – in short, in all kinds of things.
A Bank experienced in the construction and property development arena can tailor their service, not just to individual business circumstances, but in line with the effect the current business climate will have on their customers.
Source: Gary Smith, Senior Manager Corporate Business, Allied Irish Bank (GB) Brighton, Gary.m.smith@aib.ie, 01273 570059 / 07900 137103
Call your local branch, or the Large Business Team on: Tel: 020 8249 4542
Fax: 0870 400 9400
