The Untapped Abundance of Commercial Lending Facilities

The Untapped Abundance of Commercial Lending Facilities

8:00 AM, 27th November 2012, About 11 years ago 4

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In my last blog about Commercial Lending Facilities I talked about my recent experience at the National Association of Commercial Finance brokers 20th Anniversary Celebrations.

I know for sure that many people will be shocked at my revelations that there are over 30 lenders currently providing property development finance and more so that the majority of them claim to be struggling to hit their lending targets. I asked the question in my last article“could it be that “self limiting beliefs” amongst lenders, brokers and perhaps more importantly, would be borrowers, are prolonging this recession?”

In this blog I will share my perceptions of what’s going on.

It is certainly no secret that many of the better known lending institutions have significantly reduced their exposure to lending. It’s not personal although it can certainly feel that way when a bank says no to what appears to be a perfectly logical proposal. It seems even more personal when a bank calls in facilities after having enjoyed a profitable and uncomplicated relationship with a business for several years. The reality in many cases is that lenders are under instruction from regulators to reduce their exposure to certain classes of lending and often the location of that lending. Therefore, some banks will happily do similar deals to those they will decline in other parts of the country. It’s these types of stories the press have been picking up on and reporting for nearly five years now. As a Nation it could be argued that we have been brainwashed into believing that nobody is lending, hence my reference to self limiting beliefs.

If we wind the clocks back just six years the mentality of borrowers was completely different. If the bank said no borrowers would simply look elsewhere. In fact, lots of businesses would regularly shop around to make sure they were getting a good deal even if their banks were lending. It wasn’t always about price either, some businesses just didn’t like having a new business manager every 12 months or so and being treated like a number as opposed to a valued customer.

As a result of the media based brainwashing I’ve described above I am seeing clear evidence that businesses are accepting no for an answer far too easily. I also suspect that several businesses are not even trying to find finance any more because they have been brainwashed into thinking that their search will be futile.

This begs the question; why don’t the banks that are lending just advertise?

If only life was that simple! I asked this question of many commercial lenders I spoke to at the NACFB event and their answers included:-

  1. Where would we advertise? We are just a niche lender operating in a certain geographic area and niche in the market. If we advertise we could be bombarded with all sorts of applications and we are not geared up to deal with that.
  2. We don’t deal directly with borrowers, we have a trusted panel of introducers of business and they collect all the information we require. We don’t have the resources to deal direct.
  3. We have tried advertising and simply got flooded with applications we couldn’t assist with resulting in our service to existing customers grinding to a halt.

Frustrating isn’t it?

These smaller lenders do well when the mindset of borrowers is not to accept no for an answer and also to shop around for better deals and relationship based banking than the bigger lenders offer. These smaller lenders tend to pride themselves on customer service and relationships but they need the bigger banks to be in the market for their business models to thrive.

The other self limiting belief amongst borrowers is based on price. For over a decade borrowers were exposed to unsustainable pricing models as a result of an over-heating in competitiveness. This became the norm for many businesses and the prospect of paying a lot more for lending or having to have a greater financial input into a deal is now perceived as a rip off or banks not wanting to lend.

So why aren’t the brokers advertising?

I am probably over generalising here but based on the alcohol influenced admissions of brokers that I heard towards the end of the evening have I’m left with the impression that they are too skint to speculate. They have have a very tough few years and whilst they are witnessing green shoots similar to those in 1997 they recognise it’s going to be a very long time before their earnings are back to the levels of 2003 to 2007. In the meantime they are living from hand to mouth, supporting whatever they can’t downsize of the legacies of their former business models. Perhaps the new blood in the market will do better but they don’t have the experience and contacts.

So I ask you, what is the answer?

Commercial Finance Blog

This is part two of my commercial finance blog


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17:26 PM, 2nd December 2012, About 11 years ago

Here's my experience: I approached several lenders of property development finance in 2011-12 for a proposed small block of flats, and I'm afraid I did find them extremely expensive: interest rates comparable with credit cards, a hefty fee even to look seriously at my application, and entry and exit fees based on a percentage of the sale price for no good reason (why not a fixed price if the fee genuinely reflects the set-up and close-down costs for the finance?). The amount of competition seemed minimal: they all wanted to charge about 1.5% per month, and sought to charge every conceivable cost to the client - travel fees, meeting fees, inspection fees and so on. They were very quick to itemise every charge to me, but refused to itemise and justify how they reached their own interest rates and setup or exit fees - it was all completely opaque.

I ended up building to sealed structure stage using cash, and then approached a largely-nationalised high street bank, who were willing to lend at much better rates: just £5000 application fee, no exit fees, and an interest rate of 5.5% on a 45% LTV loan, plus intermittent charges like £395 for a stage inspection.

Having turned a reasonable profit on my flats, I am currently building two new 4-bed houses for cash. This is still a struggle and will involve using credit cards for the last 8% of the build, but this is still preferable to the hours of time I felt I wasted with these specialist development lenders, who seemed to think they were doing me a favour in charging 1.5% a month on £330K of lending, plus their never-ending set of add-on fees. Perhaps, as Mark suggests in his article, I do have an unrealistic assessment of the appropriate risk/reward ratios for property development lenders, but frankly I'm certainly not achieving a 1.5% per month return on *my* capital and labour when I do these development projects. I'm therefore blowed if I'm going to offer that level of return to people who, yes, have available capital but do not do anything like the amount of work I do. All the risk and stress, plus 50-60% of the capital, is on my side, and very little on the lenders' side: all their costs are covered by the fees, they get an APR pushing 20% on their cash, and they get repaid first, so if I sell at a lower price than anticipated or overrun on my costs or timescale, they see no reduction in their profits - all the loss is on my side. If, however, I can secure long-term investment by friends, family or a business partner, their expectations for dividends and ultimate repayment of capital are much lower and there is a much more equitable balance of risks and rewards when compared with my investment of my own capital and time and effort.

Mark Alexander - Founder of Property118

19:13 PM, 2nd December 2012, About 11 years ago

Hats off to you for your fighting spirit. I was talking to another builder recently who has had a great year doing 'build to order' deals which are funded by the purchasers. It started with a speculative re-development of a bungalow which he' sale agreed' part way through. The purchasers were a wealthy family and asked the builder to buy the property next door to to do exactly the same thing for their sister. They funded the project entirely. On the back of referrals he's got three similar developments to do. Nice work if you get get it hey? The wealthy family are now offering to provide 70% development funding to this developer for 5% interest and first charge, NO FEES, apart from the developer paying for the legal costs, valuations and architects certificates! For the wealthy family it's a far better deal than they can earn on their savings in a bank.

I've written another blog about the potential from a completely different perspective this week. It's an example of how the fighting spirit can become self destructive. It's based on a true story which rattled my cage a bit. Please look out for it as I'd appreciate your views on that when it's published.


17:23 PM, 12th December 2012, About 11 years ago

I Had a similar experience with a bridger recently-I was looking to raises around 85k on a cross charge bridge to fund a renovation project then remortgage away or sell at the end-the usual fair.. They offered 1.55%pm, usual in and out fee's, but when i broke their costings down i realised that they were also charging 1.55% interest on their fee's too but which were to be subtracted from initial release of funds. So in effect i was paying their fee's upfront from the initial advance, then when they did their final calcs at the end (interest was rolled) they were charging 1.55% on all of their costs/fee's as well even though they had already been paid at source! Maybe this is standard practice but it does seem rather opportunistic of them...Needless to say........!

Mark Alexander - Founder of Property118

17:28 PM, 12th December 2012, About 11 years ago

Hi John

You need to shop around a bit more or find yourself a decent broker. As Jim Bowen used to say on Bulleye "Take a look at what of won!" >>>

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