7 rules to avoid running out of cash
With expert insight from Mark Ashbridge
There’s a misconception about wealthy people. From the outside, they may appear to enjoy financial security and a seemingly endless supply of money.
Yet behind the scenes, some struggle to balance income and expenditure. They may have cash flow problems like anyone else, only bigger and more complex.
Why Wealthy People May Struggle
Clients may have millions of pounds of property, chattels and other investments. On the surface, they look prosperous and secure.
However, the reality may be different.
They may run a sizeable business which requires significant working capital. Shocks in the wider economy, such as the recent pandemic, can severely impact a business’ cashflow and can result in them running out of cash. Approaching a bank, either their own or a third party, can lead to months of negotiations without the desired result. The problem snowballs as they search for credit from suppliers or borrow short term within the wider business or family. Thoughts of selling assets, as a last resort, loom over the business owners or family members.
But it doesn’t necessarily have to get to this.
7 pointers to avoid the pitfalls
Mark Ashbridge shares his wide experience in complex cases, and pinpoints his top 7 areas for wise debt-planning.
Timing, as they say, is everything.
If you need money quickly, you may consider approaching a bank or selling an asset. Mark advises:
“This isn’t always a quick fix. It can easily takes 6 months from loan application to receiving the funds. That’s a long time if you’re in a pinch. We’d also recommend getting your financial accounts prepared promptly after the year end, otherwise it may delay your application.
Consider assets you can liquidate quickly, rather than always being at the mercy of banks and lenders. However, selling assets under firesale conditions may leave you shortchanged and there may be tax consequences such as Capital Gains Tax, for example. It may also take considerable time if you sell specialist property into a niche market.
There may be ways to keep time on your side, though – for example, negotiating additional short term credit from your bank or putting in place a short term lending facility from a third party source. That’s something we can help you with.”
2. Refinance Risk
After the financial crisis of 2008, many people found themselves as “mortgage prisoners” when they came to the end of their existing mortgage product. If you wanted the next best rate from your lender, you went through another affordability assessment, and possibly found you no longer met their criteria – trapped!
The good news is that most mortgage lenders can now offer new products without further formal affordability assessments.
However, with commercial loans the principle is still the same, meaning vulnerability if your situation changes. As you near the end of your loan term, a lender’s appetite may have also changed. There are lots of “ifs and buts” and little certainty.
The more prepared you are, the easier it will be to navigate your way to a refinance deal, and employing the services of a specialist finance advisor such as ourselves makes a big difference”.
3. Change of Circumstances
Covid 19 has taught us that you never know what’s around the corner. When things go well, it’s important to enjoy the moment, but be prepared for change down the road.
Mark: “One of our clients was very successful in their career, but their employer went bust during the pandemic. Thankfully, they found new work quickly, but being on 6 months’ probation meant it was difficult to raise money for a new start-up leisure enterprise on their small estate.
With our assistance, all funding opportunities were explored and the clients recently completed this important phase of debt drawdown. The key was careful planning, our attention to detail in the application process, and our relationships with the other key professionals in order to make this happen”.
4. Stage of Banking Cycle
Perhaps not a widely-known fact, banks go through different cycles of lending appetite. We help our clients understand this unpredictability, which can be a make-or-break factor.
Mark : “I use the image of a bank turning its lending tap “on” or “off” at different times. If a bank has money to lend and wants to grow its loan book, it may well “turn on the tap”. Its interest rates drop, and its credit policy becomes more accommodating to encourage borrowing.
However, the same bank may in time take a strategic decision to reduce its exposure in any given sector. In effect the tap is “turned off”, its credit policy is tightened and its lending slows down.
Different lenders are at different stages of their cycle at any given time, and macro factors, such as a financial crisis or pandemic, also play their part.
This can have a huge effect on borrowers and is something we’ve helped clients navigate, particularly during Covid. We’ve helped people at risk of being displaced because of market volatility, and encourage clients to view us as their long term partner. We have our finger on the lending pulse”.
Mark explains further with a client example from the 2008 financial crisis:
“In the wake of 2008, a historic landowner approached me. He wasn’t getting the support he needed from his long-time lender and recognised that a financing crunch-point was looming as some large property development bills were about to appear.
We gathered his financial information and business plans, and viewed all of the planned works. Over the space of 8 weeks, we were able to prepare and present a full refinancing and new finance application to several lenders. We came up with significantly more attractive terms than he currently enjoyed.
But of greater importance, we delivered the cash he needed to complete the developments, and did so on time.”
5. Consultation with other professionals
“Relationships, experience and knowledge are key to our work,” says Mark. “To better serve our clients, we would typically wish to consult with your team of professionals, such as your accountant, lawyer and property agent. This ensures our advice is consistent with theirs and avoids any unintended consequences such as tax liabilities. In many cases, we introduce our clients to third party specialist professionals, where they don’t already have that capability within their team.
Assuming there is sufficient time, we would direct you towards accountants who are specialists in your sector. They can ensure you are maximising the tax benefits of any finance raising and help avoid any pitfalls”.
6. Liquidity and Risk
When we consider assets as bank security or as part of a client’s overall portfolio, we focus on liquidity and marketability. These are fundamental to assessing a client’s risk and the perception of risk that a lender will take. Mark explains:
“Some assets are more specialist than others. By definition, this can impact upon liquidity or the ability to convert that asset into cash, should you ever need the money. For example, a grouse moor represents a discretionary purchase for the very wealthy. Therefore, in uncertain times there may not be interested buyers. That may elevate risk and is something that lenders will take into account.
Conversely, a publicly traded investment portfolio is extremely liquid and can be converted into cash within the day. However, this route may cause a CGT charge and being out of the market may also be costly.
Our advice would be to examine the portfolio of assets across the client’s estate and make an assessment of the relative level of liquidity in a number of scenarios. We can help you with this, and it’s part of the work we would do for any lender application.”
7. A Balanced Portfolio
“Diversity and flexibility are vital for a pragmatic approach that adjusts to banking industry cycles,” says Mark.
“We encourage clients to have as balanced a portfolio of assets and debt as possible, so that options are available. A mix of assets might include residential, commercial and agricultural and the placement and positioning of debt across these assets is also important. Finally, the maturity of loan facilities should be considered and again this can be staggered across a time frame to manage risk.
Our advice in a changing world – don’t have all your eggs in one basket”
Anyone can run out of cash, and keeping on top of your financial situation is key. We’ve supported many clients at crisis points, and helped others avoid them.
Complex issues, large estates, and wide portfolios are well-known to us, and our clients refer us to others based on strong outcomes. We have a wealth of experience in slowing down or stopping the debt snowball in its tracks, working towards less dependency on banking cycles and more proactive planning.
Whether you’re looking into being prepared, or are at a tipping point, we’d love to hear from you. We’re here to help.