Focus on security, not risk
Angus Dent, chief executive of ArchOver, explains the importance of solid security
RISK IS OFTEN SEEN AS a dirty word. Those who don’t understand it often feel instinctively that it’s something they should avoid. But it takes risk to make money. Those with no risk may have nothing to lose, but they have nothing to gain, either. Risk is something that lenders need to take on to make it worth their while – the question is, as a lender, how do you know how much risk you can take on?
First, change your focus from risk to security. Risk is a nebulous concept, but security is solid, it’s tangible. When you’re deciding whether or not to back a loan, don’t look at the risk involved, at the shadows – look at what is tangible. What is the loan secured on? How has the company proved its ability to pay back the loan? Take the time to investigate how that security’s been taken by the facilitator and how it’s been enhanced. Security is what protects your money – an acceptable level of risk is one that’s balanced out by solid security.
Solid security is security that matches the loan. There are more imaginative ways to take security than asking the chief executive to put his house up against his company. By way of example, if the facilitator leverages an overarching assignment on contracted revenues, the resilience of the security is tied to the company’s ability to repay. If they can’t prove that ability, they don’t get the loan in the first place because they can’t offer sufficient security. That double layer of reassurance is far better than a Hampshire pile.
Ask whether the security in place is real and appropriate. Lots of lending these days is done with minimal credit analysis and based on a personal guarantee. But in business lending, a personal guarantee doesn’t say anything about the health of the business. The fundamentals of security should be whether the company can afford the loan. Can it pay it back? Can it pay the interest? The size of the owner’s house doesn’t affect that at all – so it’s not an appropriate piece of security. And it’s hard to turn a house into cash quickly – if the balloon goes up, you don’t want to have to turn estate agent before your lenders get their money out.
It’s the same thing if you’re trying to secure a short-term loan against a building. That wouldn’t be appropriate security either, which is why bridging is so expensive – to mitigate the risk. A building doesn’t turn into cash quickly, whereas a sales invoice does. It’s not just about what the security is, it’s about the appropriateness to the loan. Getting the lenders repaid when they’re supposed to be is a key part of security – it’s about the timing as well as the amount on offer.
The bottom line here is that the best kind of security is a company with a strong business model that can afford the loan. In turn, that means you need a good facilitator with strong credit analysis to select those companies and ensure they’re being managed well. Before you decide how much risk to take on, investigate the security and credit analysis behind the loan – don’t set sail in a leaky boat.