Warning Signs, bad debts (6) Flashcards
What are common symptoms of cash flows difficulties?
- Breaking an overdraft limit
- Frequent requests to increase overdraft limits
- Frequently revoking issued cheques
- Frequent requests from requests for status enquiring from other providers of finance
- Cheques made out in round amounts
- Hardcore debt in the overdraft
- Cross firing of cheques (can also indicate fraud)
When a customer attempts to break an overdraft limit, what questions should the lending banker be asking themselves?
- What has caused the excess?
- Was this an error by the customer?
- If the business profit or loss making?
- Does the account swing from debit to credit?
- Is the trend of average balances worsening each month?
- Is there seasonality in the business?
What is overtrading?
When a business expands to rapidly in relation to their capital resources that are available
List the actions a bank can take in order to prevent business failure
1 - Informal chat 2 - Formal facility review 3 - Facility restructure 4 - Intensive care 5 - Lending review 6 - CCJ 7 - Insolvency action 8 - Liquidation (death)
When hardcore debt is evident, what should the bank do?
Conduct a review of the facility and restructure it if necessary. Perhaps a term loan or factoring facility would be more appropriate
When a business fails, what will a lending bank need to do?
The bank will obtain a judgement to seize and sell asset or obtain a charging order (allows for a charge to be attached to an asset)
What action can the bank take in the event of a borrower defaulting on an unsecured debt?
The bank can obtain a charging order on the borrowers house. When the house is eventually sold, the bank is repaid before sales proceeds are passed to the seller.
What was a unsecured debt, becomes a secured debt
What actions should the bank take before insolvency?
- Transfer the business to a specialist business support
- seek to negotiate / implement reduction in the outstanding debt
- Take additional security if possible (i.e. no debentures)
- Claim a charging order
Under the lending code, If a banks internal systems indicate that a customer is in financial distress, what should the bank do?
- outline an approach to tackle the financial difficulty
- encourage the customer to contact the bank if they are worried about their position
- offer the customer appropriate and timely options to help reduce further financial deterioration
- direct the customer to free, independent monetary advice
Under the lending code, If the customer is in financial distress, what form would the bank ask the customer to provide?
Asset, liabilities, income and expenditure (ALIE)
This will help the bank and customer create and action plan
When the bank and customer review the ALIE form, what will they be looking to create
A repayment plan
If a business is in distress, the bank may ask the business for more info, such as taking an independent financial review.
What will this include or highlight?
- opportunities for improving cash flow
- the main business activities or new markets
- the business’s investment needs or refinancing options
- any recommendations for the future
The lending code states that banks should work positively with a customer to support the long lasting, successful running of the business, on the condition that that customer does what?
- acts in good faith
- keeps the bank informed
- keeps to the agreement they have with the bank
- carefully considers what advisory say
- is prepared to make changes early
What is the aim of insolvency law?
To protect and balance the interest of the competing creditors when a debtor enters into financial difficulties
Recently insolvency practitioners attitudes have changed towards companies in financial difficulty, how is this?
They are now more focussed on restructuring companies by restructuring facilities rather than closing the business down and selling its assets.
If the business is rescued the creditors are more likely to be repaid than if the business was liquidated