In the first issue of Commercial Finance Introducer I outlined the main differences between the residential mortgage market and the commercial one and also looked at the kind of things a broker needs to have in place before they consider offering commercial finance advice. Assuming all these factors have been put into place, the next step is to educate yourself about the market you will be operating in.
As I explained in the last issue, there is no sourcing system for commercial finance advisers (and listing two commercial product providers on a residential system doesn’t count in my view) but there are ways to become familiar with commercial lenders’ offerings. The alternative, if you prefer, is to work with another, more experienced, broker who is familiar with the lenders and their products until you feel confident enough (or until the level of business you are getting grows sufficiently to make it worth your while) to go it alone.
Looking for a way in
There are probably three main ways you can start in the commercial finance industry and they could probably be seen as tiered depending on the level of involvement and expertise required by the introducing broker. Please bear in mind that these models are meant as guidelines only – packagers and broker to broker businesses can work in different ways. The easiest way for advisers to place commercial business is the ‘broker to broker’ model, as an experienced commercial finance broker does the donkey-work of placing the deal. Using a packager requires more involvement as the broker will need to know with which of the packager’s panel of lenders he wants the business placed. The final level requires the total involvement of the introducing broker as he puts the deal together from start to finish. He will need to know the most appropriate lender and be able to put the deal together for that lender.
1. Broker to broker
There are commercial finance brokers in the market who only deal with other brokers, not with the customer directly. These brokers are not to be confused with ‘master brokers’ (although some of them are master brokers) who are brokers specifically chosen by a given lender because they put a significant volume of business in that lender’s direction. The lender, for economic reasons, then states that they will not deal with any broker who falls below a set volume of business, and these smaller brokers must put their business via a ‘master broker’. This is more to do with lenders controlling the channels by which business is put to them, than any specific business model of the broker in question.
A business to business broker’s business model is that they write the business of brokers who would not otherwise know how to place the deal. They broke the business across a wide panel of lenders and the commission is split with the introducing broker. The Business Mortgage Company (TBMC) is one of the largest broker to broker commercial brokerages in the country and it can offer products that brokers wouldn’t be able to get anywhere else. This model is ideal for those brokers who only write one or two commercial deals (at least initially). Paul Rockett, managing director of TBMC explains: “TBMC Commercial provides a whole of market offering and does not restrict its business to a panel of lenders. This means that brokers can be confident that the most appropriate commercial mortgage in the market is sourced for their clients.”
A broker to broker business is different form a more traditional packager, as Rockett explains: “TBMC Commercial is different from a typical packager setup as we provide a choice of service – for those more experienced brokers we can provide expertise, access to special schemes and support in dealing with a case while the broker retains control of the client relationship. Alternatively we will deal directly with the client throughout and the broker will still receive the full procuration fee. Another advantage of dealing through us is that brokers are covered by our Professional Indemnity insurance for all commercial mortgage deals transacted though us.”
2. Packagers
The next alternative is to use a packager to place the business. A broker will need to take care here – there has been a spate of ‘commercial packagers’ setting out their stalls in recent months – and many of these offer an extremely limited panel of lenders. If a packager is the way that you want to do business, make sure that they offer a wide panel which features at least one high street lender. This way you can be confident that your client will get a competitive deal.
3. Do it for yourself
Once you have built up a level of experience using one of the two methods mentioned above, and if the volume of business you are writing makes it economically sensible to do so, the most flexible way of writing commercial finance business is actually to go it alone. Although it might look daunting, there are sources of help out there – the NACFB obviously being one.
Education, education, education
The focus of 2008 for the NACFB has been very much on education. Not just of our existing members, but also of new brokers to the commercial market. The Association is running a series of events around the country aimed at brokers new to the industry to make sure that they understand not just about the important differences between commercial and other kinds of finance but also how to put a commercial deal together. Not only that, but once a deal has been put together, a broker needs to know which lender to place it with. The Association organises ‘networking’ days which allow busy broker to take one day out of their schedule and meet with 30-40 lenders – from high street banks to specialist, niche funders – so they can expand their panel and find what different lenders can offer their clients.
Another very important point which often gets overlooked is that there is more to commercial finance than commercial mortgages. A business seldom starts and finishes with a building. Take, for example, a restaurant. There may well be premises that require funding, along with equipment and possibly a vehicle. Some kind of cash flow finance might be required as well. Now the ultimate aim is not simply to place all the business’s funding requirements under the heading of a commercial mortgage. Commercial mortgages, like their residential counterparts, are a long term and not particularly flexible form of finance. A more appropriate solution might involve a smaller mortgage for the premises, leasing and asset finance for any of the equipment, perhaps pay roll finance for any staff or a contract lease for the vehicle.
A good broker should be able to look at the business in its entirety and offer appropriate solutions to the funding problems and not simply wrap the whole deal up in one large commercial mortgage. But being aware that other kinds of finance are available and might be more appropriate for a client doesn’t mean that you need to be an expert in them yourself. Many experienced commercial mortgage brokers will write the smaller, less complicated deals themselves, but hand more complicated business to a specialist leasing and asset finance broker, and the leasing and asset finance broker often reciprocates with any commercial property deals he comes across.
There are qualifications available to brokers who want to take the learning process a stage further. The Certificate in Commercial Mortgages (CeCM) from the ifs is available as a stand-alone qualification or as part of the Advanced CeMAP paper. This offers a basic grounding in commercial mortgages but there is a Diploma in commercial finance for anyone committed to qualifications.
So, as you can see, there are various ways a broker can get involved in the commercial market and hopefully, this has given some insight into how you can get started. Many mortgage intermediaries are looking to commercial finance to provide an extra income stream in the coming months as the credit crunch continues to bite, but it should be pointed out that commercial finance isn’t immune to the current conditions. The commercial mortgage and buy-to-let markets are also suffering, with lenders tightening criteria and lowering loan to values. But for those willing to ride out the storm, commercial finance promises to be a buoyant market in the future.
