Secondary lending provided so much promise after the 2008 banking crisis.
A brave new world of funding had the opportunity to take root, as traditional bank funding to SMEs is paralysed by archaic systems, over regulation and the consequences of mistrust brought in by their excesses of the noughties (naughties some might say).
The emergence of Crowd Funding allowed for direct investment and loans to SMEs provided on proper due diligence, whilst Invoice Finance was becoming generally more accepted as a form of funding providing good security for lenders and proper growth funding for businesses.
But just when you think the system is developing firmly, so do the vultures and they look to share the spoils.
Desperate to create funding liquidity to SMEs, the government, via the British Business Bank, lends to businesses through Crowd Funding Loan providers. Equally desperate to get returns on cash, Institutions pile further funds into the same arena. The unfortunate side effect results in a change of focus; Crowd Funding Loan providers switch from due diligence to lowering the funding criteria to get the funds out there.
On the Invoice Financing side all sort of variations entered the market place, ranging from the funding of small construction contracts to the total dependence on Personal Guarantees.
Piling into the mix are loan providers who have no regard for the substance of the business, again relying solely on Personal Guarantees to support their lending and inviting their friends to lend more.
THE DISASTER IS HERE AND NOW
In 2016 we have had the busiest year dealing with Personal Guarantees, post the 2008 financial crash.
The dynamics are different though: Whereas before there might be a traditional bank guarantee and possibly some trade and asset finance PGs, a common feature now is that there are four or five secondary lenders, some of whom have been sold in by the first one on the scene, gradually building a debt of oblivion with no regard to the business' ability to pay, no check and balance or security on the business itself. The only securities are pieces of paper purporting to be Personal Guarantees, mostly signed by a sometimes desperate Director of the company.
There is no doubt that company Directors ought to be acting more responsibly in considering the finances of their business, but we all know how common it is to think that one more piece of lending will turn the business round, only to fuel further losses and an irreversible demise.
Where do you start?
Well, by the time the business has borrowed to the hilt in this way, the tank is dry, the business is now damaged goods and a managed recovery is all but lost.
Even if there was some hope, the aggressive pursuance on multiple personal guarantees (being the only security these firms have) distract the Director from focussing on recovery of the business.
There are wider implications.
Companies that should have restructured a long time ago have no choice but to shrivel and die. Turnaround and business recovery specialist skills can do nothing other than a burial.
There are good, ethical secondary lenders out there. But they are crowded out by the noise.
And when everyone wakes up to what is going on and cry foul, those good providers will be tarred with the same brush. The market will tighten and confidence will fall and all of a sudden there is no funding for SMEs.
The cry for tighter regulation will squeeze the life out of entrepreneurism, in the same way the positive enterprise changes in 2003 to facilitate the same has been totally over-run by over regulation.
The root of this seesaw effect of market liberalisation to acute over regulation, of course, is the sacrifice of sound ethics and financial prudence for the prerogative of a quick buck and buy now pay later; I guess it is human nature.
And we are all part of that system. As I say to anyone that will listen, you have to create your own micro economy, and you have to apply your own ethics to everything you do and not be swayed by the furore around you, the cycle of life forever turns.
9 August By Mel Loades