The commercial finance broker of today is changing: they are returning to their strengths. Looking back, it wasn't that long ago that a lending proposition was presented to a bank manager after an initial interview. It was then assessed by a person, a human being, who did not tick boxes; but who had the knowledge and experience - including a personal insight into that individual and their business. Every single deal had a story behind it, and it was that story that either made or broke that deal for the broker and lender. But the human element of risk assessment has vanished in a flurry of forms, call centres, sales people, and boxes to be ticked.
I think the old fashioned way of considering a loan is returning and, whilst we make huge technological advances in areas such as IT, communications and media; the banking world of 2009 will wind itself back some twenty years or more in terms of lending principles. But where will the expertise come from? All the experienced commercial lending bankers from that period are long gone, having been pushed aside to make way for younger (and cheaper) sales teams. Interestingly, many became commercial finance brokers. After years of advising business customers, they now have their own businesses: they spend their time reviewing potential deals for clients, assessing sets of accounts from a customer's business and putting together commercial loan applications.
Risk assessment
This is part of the problem for lending banks. In a market where risk assessment is everything, they have lost many of the old style managers who would be able to make that kind of a decision without a tick box in sight. Caution in a downturn is one thing, but it seems as though this lack of experienced risk assessors at the coal face is beginning to translate into a 'Be safe, do nothing' approach. One broker joked to me that the only way a client could get any lending out of his bank was to prove he didn't need it. So is the answer to the question of the missing generation of bankers to ask a commercial finance broker to appraise the application before it is offered to a lender for consideration? For an SME, the answer has to be yes. The other big advantage to the customer, of course, is the old selling point that he is getting 67 possible funders (in the case of an NACFB broker) for the price of one visit.
I have said it a number of times before, but now is the time for brokers to really make the most of the market conditions. We all know that placing business is very, very difficult at the moment and there are no signs that this is going to ease. But what about the business that wants to borrow and approaches the only source of funds that it knows, its own local bank? Even if that business has been thriving, there is a good chance that further borrowing may be refused. A recent survey by the Federation of Small Businesses reveals that many of its members are still struggling to find finance and are having to cut back as lenders are still very reluctant to lend. The results have also pointed out that the new initiative from the Government, the Enterprise Finance Guarantee Scheme, has only been made available by lenders to a tiny 8% of businesses. What is an SME to do? Small businesses are failing, not because they aren't good businesses, but because their credit lines have been strangled.
Sophisticated
It doesn't necessarily mean that because you are an SME and running your own business, you are a sophisticated borrower. You may believe that because your own bank has said no, then the other four in the high street will all say the same. After all, if the one place that knows your business best doesn't think it's worth the risk, then no one else will either. Then the old enemy rears its ugly head: inertia. You wanted to expand, you wanted that new piece of equipment, or to take on more staff, but you have been told 'no', and that's the end of it. So as an SME you decide to stay where you are; you don't bid for that new contract, you don't employ more people or increase your turnover; and ultimately you don't put more back into the economy through tax and spending.
So, what could the end result have looked like if that SME had gone to a commercial finance broker instead? I don't mean just any broker, but one with experience and knowledge of the market, working to a proper code of practice, and who can look at a business in its entirety to present a lending proposal in the correct way. With the best will in the world, a banker is restricted by the lending policy of his or her bank. But not all lenders are the same, or have the same restrictions. There are differences even amongst the big players on the high street: different lenders have different appetites for different deals. And a broker's livelihood is based on knowing where these distinctions lie.
Commercial case
Not only that, but there are many different possibilities for commercial funding and to put a deal together you may have to "visit" the different aspects of that business. A commercial mortgage is not the complete answer to business funding (as perhaps some were led to believe only a year or so ago). As finance goes, a commercial mortgage is an expensive way to fund anything other than property; it's both a long term commitment and relatively inflexible. It seems almost inconceivable now that barely 12 months ago, cash was available to almost everyone at what now seem to be incredible loan-to-values and low rates.
Now every business needs to be looked at in its entirety. How much does the business need to buy its property? Do the loan-to-values stack up in the current market? If not, does the business have any other assets it can use? What about equipment finance or vehicle finance? Will trade or debtor finance make a difference to the overall picture? In this market, if you want to make a commercial lending case work, it is no longer about ticking boxes; it is about the story of that business.
As they say every good story has a beginning, middle, and an end. As a commercial finance broker, you should understand all these elements as your average SME almost certainly will not. And although a lot of the experience may have been drained from the lenders' front lines, the good news is that it's probably still in the market as a member of the NACFB.
