Loan spreading...Is this a reputational risk for Brokers or a funders excuse for their own attitude to risk?

Recently, an article was published in the NACFB magazine by a commercial finance provider condemning the practice of 'Loan Spreading' or 'Loan Stacking'.

Loan spreading or loan stacking refers to a business obtaining a number of different loans from a variety of loan providers to get the required amount of finance to support their project or bridge the gap.

As a broker, I was particularly annoyed at this article as it:

a) suggests that brokers are pushing irresponsible lending practices and

b) that it is down to the funders to put a cap on the amount a business can borrow based on their individual lending parameters.

Let's look at this as a case in point of two recent funding applications that we have facilitated at ABL Business.

Share Buyback - A business that has been trading for 15 years and is profitable needed ￡500k to purchase the shares from one of the Directors. In this situation, as brokers, we know that some of the lenders put a cap of just ￡150k as a maximum lend to businesses in a share buyback situation.

These are terms imposed by that lender, so if we looked at loan spreading in the context of bad practice, this would mean that as far as this lender is concerned all share buybacks should be capped at a cost of ￡150k. Obviously, this is ridiculous and because of this, we utilised a number of funders to get to the ￡500k required and also leveraging assets within the business to support the lend.

Corporation Tax Bill - Another business had a corporation tax bill of ￡600k and the funder that had provided them with the funds on previous occasions capped the level of funding at ￡450k for corporation tax. Again, the client was left with a deficit to find.

It is worth pointing out here that the client had the ￡600k available to pay the bill but from a cash flow and budgeting, perspective was happy to pay the fee's for finance because it allowed them to utilise the ￡600k they had saved in other ways to support the business growth. Again, we obtained an additional loan to cover the extra ￡150k required.

I understand that there are cases when two loans may be obtained at the same time from two different funders and that if the business draws down on both at the same time they can get additional funds that one lender wouldn't have offered. But this is the result of algorithms and finance portals. If an individual was responsible for making the decision then the question could be asked 'Are you applying for finance elsewhere? If so, how much? And what impact will this have on your cash flow if it is obtained?'.

So, I put this back onto the funders, instead of blaming brokers for bad practice, look closer to home at your own policies and procedures. You may find the answer to stopping bad practice lies there!