Bank Guarantees are a regular part of a newsagency business, indeed any small business. In our channel, landlords and some suppliers require them to reduce their financial risk in the event of an insolvency event. For example, every newsagent would have a bank guarantee lodged with Network Services.
Prior to the Global Financial Crisis, a Bank Guarantee was fairly straightforward to obtain. Your bank would usually write the guarantee based on your overall position with them. That all changed last year as the impact of the GFC reverberated through Australian banks.
Today, most major banks require Bank Guarantees to be backed by cash on deposit or 100% securitisation with property where only up to 60% (or thereabouts) of the bank valuation of the property can be used.
In addition to tougher rules, the fees associated with Bank Guarantees have increased. One major bank dealing with newsagents has increased annual Bank Guarantees by 400%.
These one relatively cheap instruments of protection for creditors are now quite expensive. Which brings me to my core point…
The cost to the newsagency channel of the Network Services required Bank Guarantees has increased dramatically over the last two years. This is an additional cost we need to factor into our assessment of the profitability of the magazine department.
I would like to see the use of Bank Guarantees reduced for products over which we do not have reasonable control over our level of indebtedness – such as magazines. Such a move could free tens of millions of dollars for the newsagency channel.
Mark thank you for sharing more information about the workings of magazines in newsagencies. As I have written here before I am a small publisher and rely on newsagents to stock my product. The more I understand about your cost of business like these bank guarantees the more informed my own decisions.
When we talk with our distributor they gloss over these and other costs you have.
You are right to bring this to the fore Mark. I have been in this game for more than ten years and have never missed a payment to Network yet they will not release me from the bank guarantee. My bank changed their rules about bank guarantees last year and now this network guarantee is costing close to $1,000 a year to maintain.
I have 2 guarantees – Network $7,500 and the landlord $7,300. I have $14,800 on term deposit to secure these, giving me interest at 6.2%, or $915 per year. The bank charges me $125 per bank guarantee every 6 months or $500 per year. If I did not have to pay these I would have paid the $14,800 off my business loan, which at 8% would save me $1,184 per year.
The bank guarantees are therefore costing me $500 bank fees + $1,184 lost interest – $915 interest earned = $769 per year.
I’m a bit confused about these bank guarantees. We purchased in March 2008 and Network merely required us to lodge a security deposit. Yes, its a substantial one so it does cost us in interest as Dean outlined, but no annual fees at least.
We are getting pushed by network at the moment and when I asked what happens to the security deposit when the account is closed and we do not owe anything they say it is non refundable. So I may as well stock up and close the account in debt if I have lost my money anyway.
I repeat it here that I do not owe them anything they are just unhappy that I do not pay by the 20th of the month.
The security deposit is refundable when you close your account and have settled all debts with Network.
Shayne, you won’t have fees if you deposited cash with them. You will, however, earn interest at the RBA rate.
Thats good to know, as it is not what they are threatening me with. I’ll need to push back a little harder.
I want to keep our account open, as we have been here 20 odd yrs but it is all getting a bit too one sided against us at the moment, we only hear about the suppliers rights in regards to contracts and never our rights to supply levels and speedy returns credits. It’s all well and good for them to want payment by the 20th or else but they can hold onto my credits for weeks on end without it appearing on my account.
Mags accounts are our last direct link to the newsagency channel and if we were to become subagents for mags then it may be better for me as banks have a low view on newsagencies as I found out when I swapped lenders. We could not get refinanced as a newsagency but were ok when when we explained that we were more or less a general retailer.
Hi Mark,
Are you saying that Network should be paying us the RBA cash rate, if we have provided them with a cash deposit as security…
We provided a $10K deposit over 6 years ago and have never seen a return… Is this meant to be compunding at the RBA Cash Rate?
Cheers
Peter
Peter the cumulative interest is paid when the security guarantee is paid out.
I don’t begrudge Network wanting a guarantee when we are new to this but I do begrudge them hanging on to it long after we have proven ourselves. Good on you Mark for bringing this topic up.
We’ve been in the shop for 10 years and in all honesty i can’t remember paying this fee. We obviously did given everyone has so could somebody please shed some light into approx how much it is? I only ask because we’re selling up soon and if we’re entitled to some sort of payment back we certainly want it.
$10 thou by how many newsagencys in australia ? Geeees i suppose someone needs to enjoy the fruits of our labour . The question is if they are to close one day just like NDD will they be in a position to pay back this money ???