John discussed the issue at last week’s Finance Professional Show during a panel debate on SME lending.
Speaking to Bridging & Commercial, he explained that ‘stacking’ occurs when a lender makes a lending decision based on all the information at hand, often in the main provided by the director/officer of the company, who omits the fact that they had previously borrowed funds elsewhere and pledged guarantees to those borrowings.
This results in the borrower ending up with several facilities from lenders, with the new funding often paying the repayments on the other loans, meaning they are ‘stacked’.
John said: “These further advances all 'stack up' and totally distort the basis on which the original lending decision was made and puts both the customer and all lenders involved at risk.
He claimed that this was “rapidly” becoming a major issue in the UK.
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“At Just Cashflow, we are seeing a significant increase in proposals that fit this profile – we declined over 40 of these cases in one week alone.
“The borrowers are completely over committed and invariably have the wrong type of finance product for their needs.
“These are the specific kind of issues [the] FOS and possibly the FCA – if, as reported [recently], that commercial lending becomes regulated – will be focused on.”
John believed that as lenders, the prime focus had to be on making decisions in the best interests of customers and key to this was affordability and whether the customer fully understood the ramifications of the agreements they were entering into.
“So, what can be done?
“One answer is better information when you are making underwriting decisions and this is why the Association of Alternative Business Finance is championing the creation of a personal guarantee central database.
“We have invested in creating the platform.
“However, what is needed now is all members of the SME lending industry to commit to submitting and sharing their data.
“The prize is a valuable one: more informed lending decisions that provide better outcomes for the customer and ultimately the industry.”