Murdoch MacLennan: ‘Bad Bank’ preparing to return
Murdoch MacLennan, banking partner in Scotland with accountancy firm Azets, has warned that ‘Bad Bank’ – the term coined for the specialist units within banks where businesses showing signs of financial distress are transferred – is likely to make a return to the UK’s business banking sector in the coming months.
The combination of increased borrowings, deferment of corporation tax, VAT, National Insurance, rent and rates will mean that thousands of businesses are unable to generate enough cash or profit to service their liabilities and therefore become no longer viable.
Recent reports that there are over 30,000 businesses in Scotland in distress highlights the scale of the financial crisis shaping up for the economy. We will shortly enter a phase where traditional bank funding will become more difficult to secure and the market to re-bank a business with another mainstream lender will become virtually impossible.
Lenders will start to turn their attention away from new lending into managing accounts where performance has deteriorated, covenants breached, lending risks have escalated, sector problems have emerged and the potential for failure is high. Murdoch MacLennan pointed out however that as mainstream banks reduce their lending appetite, an opportunity will arise for alternative and specialist lenders to enter the market and play a key role in helping businesses survive.
We are clearly in exceptional times where banks will start to make moves to protect and manage their own risks, resulting in a marked contraction in available funding. There will be a large community of businesses that in normal times are trading quite comfortably but will soon be starved of cash flow and facing severe contraction or even closure.
In order to differentiate themselves alternative lenders have a different approach to risk, and they often focus on certain sectors and can be more flexible with their lending solutions and approach, which could be of value to businesses seeking to establish a new borrowing relationship.
The months ahead are going to be very difficult for many businesses, but it is important that business owners are aware that there are alternative providers in the marketplace that could help them bridge financial problems that otherwise could become terminal.