by Mike Phipps - Mike Phipps Finance
04th August, 2020
Op-Ed: The poison jellybean conundrum
Isn’t social media wonderful?
You get to connect with all your ‘friends’, share life experiences, buy and sell stuff, and - if you’re really lucky - make interesting discoveries about people and places.
Recently, I was included in a popular post that is being shared on one platform. The premise is pretty simple; designed to make an argument relating to COVID-19 risk management. An image of a bowl of 100 jellybeans is used with a caption suggesting that the aim of the exercise to is show stupid people how dangerous COVID-19 really is. The proposition is: if two of the 100 jellybeans were poisonous, would you randomly eat them or stay away entirely? Put another way, it is proposed that only the stupid among us would choose to congregate publicly if there was a two percent chance of contracting COVID-19.
To say this is a lazy argument is an understatement. To accept the proposition, we must first assume that there is no way of differentiating risk and no way to determine a percentile downside. This may well be the case with the bowl of sweets, but it is most certainly not the case in real life. Fortunately, the apparent support for the jellybean theory and the anger with which counter arguments are confronted does help us understand the manner in which our society sees risk. That is, given enough negative and frenzied press coverage and a lack of comparative risk data there is a reasonable portion of our population who will hide under the bed, regardless of the real risk or the downside of said strategy.
Do not get me wrong. This pandemic is scary as hell and I understand the fear that is out there. If being isolated is your strategy, go for it. Unlike the other risks I have alluded to, the COVID-19 endgame is unknown and may get a whole lot worse before it gets better. The trick, I think, is to understand the downside of isolation and the potential long-term damage that an economic collapse may cause. We can only print money for so long before Paul Keating’s famous banana republic comes back to haunt us.*
And all this, in a roundabout way, leads me to management rights and motel finance. When COVID-19 first raised its ugly head, we took a view that lenders would move to a deal-by-deal assessment process. That is, accommodation businesses would confront a range of possible risks and as such each finance application would need to be treated on its merits. For a while that is exactly what happened but as time has passed, we have seen an interesting development. Some management rights and motel financiers have done their best to appear to be open for business while adopting the jellybean approach. In the case of one of the majors, that means zero lending for these assets until further notice. One of their competitors has a similar policy but will not own up to it.
As management rights and motel finance brokers, these developments concern us. Choosing to abdicate any individual risk assessment in favour of a blanket approach sidelines viable business transactions and runs the risk of contributing to an already challenging situation. Thankfully, there are still lenders out there who are prepared to look at opportunities on a deal by deal basis. Indeed, elsewhere in this esteemed publication you will find a story reflecting a very positive outcome and an example of the value add contributed by specialist finance brokers like us (shameless plug!).
Our advice to anyone seeking finance right now is to be very selective in terms of lenders. Even within the same banks, we are seeing different views of policy and some disconnects between the front-line and credit departments. A lot of time and angst can be saved by engaging a specialist management rights and motel finance broker and ensuring you are not wasting your time, to say nothing of your money.
I should stress that I mean no criticism of the banking sector. By and large the support given to the business community has been exemplary and I cannot really blame lenders for taking a pause. We note that, in all likelihood, repayment support measures will continue post September for those businesses that require it and we don’t anticipate any lender aggressively enforcing loan payment conditions at this stage. Of course, loan deferrals cannot go on forever but for now they are a positive support for our clients.
We also welcome the federal government’s announcement of an extension to the Coronavirus SME Guarantee Scheme. The original scheme, announced in March this year, sought to offer a 50 percent guarantee for new unsecured business loans via 44 approved lenders. Treasury have revealed that the scheme is to be extended with the maximum loan size being increased from $250,000 to $1 million per borrower. The maximum loan term will go from three to five years and working capital only restrictions will be lifted. Importantly, secured lending will now be permitted, excluding commercial or residential property.
In summary: if you are chasing management rights or motel finance, avoid being a jellybean. You may not be as risky as the bank thinks.
* Keating said, in 1986:
We took the view in the 1970s – it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through… In the 1970s… we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart… If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic wellbeing, that it doesn’t deal with these fundamental problems… Then you are gone. You are a banana republic.
Ring any bells?