For a few months now Lord Alan Sugar has been speaking out about how small and medium size businesses have been complaining to him about unfair treatment from the banks i.e. they won’t lend them money his retort has been they needed to be told ‘the facts of life.’
At Christmas I was given Lord Sugar’s new book, Alan Sugar: The Way I See It 1, a very good read and a handbook for life that every business and young person due to leave school within the next 3 years should be given.
We all know what an irascible, impatient and outspoken person he is, but you have to hand it to him he has earned the right, starting off with just £100 and his wits he was recently reportedly to be worth £770 m pounds. So he must know something!
Occasionally I am at odds with Lord Sugar but Chapter 11, You can’t Skip the Hard Work, sets out the reality for business owners and actually describe his experience of trying to get a loan a number of years ago. I’ll explain how this compares with my experiences and views later in this article.
Lord Sugar explains that following the banking crisis the banks are reverting back to the old-fashioned banking methods. He explains that when he got into business in a bigger way he went along to his bank to ask them to assist him in proving the cash flow to take on new orders.
He goes on to say, ‘they taught me a very good lesson, a lesson which I have never forgotten. I didn’t like what they said at the time, but they were spot on.’
He continues his description of the conversation with the bank.
‘Let me look at your balance sheet, Mr Sugar,’ they said. You’re in the electronics business; you make electrical goods – Hi –Fi’s, (sound systems), TV sets and all that stuff – fine. So how much stock do you have?
‘About half a million pounds’ worth.’
‘Okay. How much of that stock is finished goods and how much is in components?’
‘Oh, I would say about £400,000 is in components – bits and pieces, screws nut bolts and electrical parts – and £100,000 is finished goods.’
‘Okay, well here’s how the bank looks at all of those screws nut bolts and electrical components. We value them at zero.’
‘What are you talking about? Are you mad? I’ve got chips that I bought from Motorola at six quid each! How can you say that they are worth nothing?’
‘I am sorry Mr Sugar but a chip is only good if it’s inside a finished product. Now as for the £100,000 worth of finished goods – we value them at half of that.’
‘What are you banging on about – half value? They’re worth much more than that. The £100,000 is the factory price – I wasn’t valuing them at retail price.’
‘Yes, I know, Mr Sugar, but you see, in a fire sale, if you went bust, and I am sure you won’t be going bust, that’s what we would be offered for them – zero for the parts and about half price for the finished goods. Now let’s move on, Mr Sugar. How much money is owed to you by your customers?’
‘Erm, about £75,000’
‘Okay, and would you categorise these customers as grade – A customers – likes of Dixons, Comet, Boots, WH Smith, etc?’
‘Well I would say that about £500,000 is owed by them and the other £250,000 is owed by smaller traders, people who have their own shops and there.’
‘Fine. Well, on the small-trader side of things, the bank would value them at around 25 per cent, and the larger stores we’d value at around 75 per cent.’
‘What’s going on here? This is unrealistic. I have got a company that has a net asset value – i.e. when I get all my money in from the people who owe me, and I flog all my stock and when I pay off all my creditors- of at least a million and a half pounds, yet you, if I’m following you correctly, are valuing it at around half a million quid?’
‘Exactly right, Mr Sugar. That’s about as much as we would be prepared to lend you and by the way, we would need a complete fixed and floating charge and debenture over the whole company.’
‘What does that mean?’
‘That means in the highly unlikely event of you do go bust, we the bank, get control of everything.’
‘What about all my production – line equipment and my machines and injection – moulding plants?’
‘Sorry, Mr Sugar, zero.’
Lord Sugar goes on to state that this was ‘a massive wake up call.’ But that the bank was spot on.
Lord Sugar goes on to explain that in later years his company got over enthusiastic about ordering too many components and then decided to cease production of the product that they were to be used in. He attempted to sell those components and discovered that they were worth nothing, despite the fact that a week before they had taken delivery of 10,000 microchips costing £5 each.
When he was re-equipping his plant and tried to sell old machinery again it was worth nothing. Sometimes he had to pay to have it taken away.
The bank was also right about the small traders; they were constantly going bust, not paying their bills or sending back goods. The large retailers mostly paid.
So he went on to say that the bank was right if you looked at what they would earn from lending him £500,000. As he says at the time assuming the interest rate was between 5 and 10 per cent their earnings from him that year would be between £25,000 and £50,000 all risked on a young Alan Sugar. As he puts it he would not work for 5 to 10 per cent.
So what’s my view on this? Well in spite of my own jaundiced views of the UK business banks and their lack of vision when it comes to some decisions on lending to small businesses, I believe Lord Sugar is right in much of what he has said here and in his well publicised other statements.
I have over the past twenty years advising, training and mentoring small and medium size businesses found when discussing balance sheets and valuations about to be put in front of banks they have proved, on examination to be to be massively unrealistic.
There are other instances of naivety displayed by small businesses. For example numerous start up businesses who I call me in having had loan or overdraft applications refused seem genuinely surprised when I point out that either they have a old out of date business plan or one that just does not hold water. Some even approach another bank using the branded business plan format provided by the first bank!
The next problem is that business owners expect the bank to put up the whole sum that they need. The bank rightly says well how much are you risking Mr Business Man? The question I ask is if they had a friend who approached them asking for a loan with exactly the same paperwork and situation how much would they be willing to risk? This is what I call the light bulb moment, when the penny drops.
I am also the first to defend a client vigorously when holding a joint meeting with their bank especially it the bank starts to demand director’s guarantees or floating charges if they are unwarranted.
Also banks will often state that they are supportive of Government initiatives such as the old Small Firms Loan Guarantee or the new replacement Enterprise Guarantee. Banks will often allow applications from a business and then pay lip service or even drag their feet on processing and making decisions. In one case it took a year of constant requests for different pieces of information, often irrelevant before ultimately coming to a decision and then not lending the full amount. All of these delays damaged my client’s business and both he and I were left with the impression that the bank just did not want to participate in the scheme. Of course a bank will always say this is not the case.
The other side of the coin is any business would be the first to complain if they went to their bank to withdraw money to pay wages and the bank said sorry we haven’t got any money to give you because we lost your deposits on bad loans to risky businesses.
Oh sorry I forgot that is why we have had to bail out the banks because some virtually went bust.
So yes, Lord Sugar you as he would say is spot on, but banks are not always right or even open when dealing with small and medium size businesses. There is an old saying, if your business owes the bank £10,000 you have a problem but if you owe them £10,000,000 they have the problem!
If you are seeking finance from a bank or other source then download my Finance Options Table and My Guide to Business Finance. Alternatively book a place on the Business Boost Workshop, Financing Your Business Growth or Survival.
Please contact me if you need advice or wish to discuss your particular situation.
1 Alan Sugar: The Way I See It © Alan Sugar, ISBN 978-0-230-76089-9 HB Published by Macmillan 2011.