Understanding Bankers and Getting Loan Capital

I believe that starting a business in a recession is perfectly possible and, funnily enough, offers opportunities that the good times don’t.  There is, however, one big problem at times like these and that is, during a credit crunch, the difficulty of borrowing money from banks.  Take time out for a moment to make sure you understand where financial lenders are coming from. 

If someone offered to lend you £10 for a week, but asked you to agree to pay back twice that amount at the end of the week, you wouldn’t need to have read this blog to realise that that’s a very bad deal.  Suppose, however, that you are completely broke and know that you will have £121 cash in benefits payment by the day at which you have to make the capital and 100% interest repayment – still not interested?  Ah, I forgot to mention that your two children haven’t eaten properly for 36 hours and that they’re wailing for food. 

In such circumstances the loan sharks of the inner city estates make such loans, and prosper.  This is a good starting point for considering the purveyors of loan capital.  They’re all like that; only the ones in banks are better dressed and less physically threatening. They are as dangerous to deal with as Old Nick, so don’t sell them your soul.  This is particularly true right now because they have so mismanaged their businesses that they have destroyed all the profits they had accrued over the last twenty years; they lost the lot.  In the end, after the Government has pulled out, the main people who will have repaired that balance sheet disaster will be bank customers.

______________________________________________________________

Tip from Shaf
Avoid borrowing from a bank to start up your new venture by using other sources of funds.  There are, for example, lots of deals out there for interest free credit cards that could just possibly give you the bit of credit you need to get going.  Suppose you need some computer hardware or software to start your Computer Aided Design company.  Buy it on one of your current credit cards.  Now transfer the debt to a new credit card that is offering at least six months interest free credit on transfers.  You should be able to buy whatever else you need using the 12-month interest free offer the card is also offering on purchases.
If you can’t pay it off at the end of the interest free period you may well be able to transfer to another card.  Word of warning though, keep a tight grip on when the interest free period ends and work out well in advance what to do next.  Current interest rates on credit card balances are more than 16% so don’t get caught.  After all that’s why the banks make these ‘generous’ offers – careless people get trapped in a high interest transaction that could cost them their business – always remember the ‘bankers’ on the inner city estates.

______________________________________________________________

A bank’s view is that they tailor their interest charges to protect themselves against the risk of default.  The more difficult the situation the borrower is in, the higher the risk and therefore the higher the price of help.
If you are running a huge conglomerate and wish to borrow $250 million to buy up a subsidiary in another country, you will be wined and dined by various moneylenders eager to get your business at, perhaps, less than 1% above the rate at which the banks themselves borrow money.  If you need £20,000 to tide your corner shop over a refurbishment, you will probably have to trawl the High Street to find a lender willing to lend you the money at 5 or 6% above bank rate.  And they will probably want you to back the security of the loan by re-mortgaging your house or leaving your kids with them as hostages.  (I made that last bit up.) 

Banks are indeed the people who lend umbrellas to small businesses only when it isn’t raining.