For those entering the commercial finance market for the first time, commercial mortgages are the most familiar and recognisable form of commercial finance for brokers from the residential mortgage sector. So it’s not surprising that many residential specialists are turning their attention to this sector of the market place.
There are distinct differences between commercial mortgages and residential mortgages – affordability and how the property/business is valued being two of the most fundamental – but it is still a loan secured on a property and as such is the easier part of the commercial market for a residential broker to get involved in. But the world of commercial finance only starts here and any adviser who is looking to diversify because of the current market conditions would do well to look at the other products and services available to businesses so that they are able to offer a fully rounded service to their clients, and maximise their own returns.
Specialist areas
I believe it’s always best to leave specialist areas of finance to specialist brokers and the aim of this article is not to turn everyone who is considering writing commercial business for the first time into a market expert in every field. The key is recognition: commercial mortgages might be comfortable, but they are also long term finance and not renowned for their flexibility. So it is important for the client that a broker recognises when an alternative form of finance might be appropriate – even if that broker then has to hand over the nuts and bolts of doing that deal to a specialist in the field. Many specialists are happy to work with other brokers and split the commission earned from a given deal. However, before you can work with another broker you need to be aware of the other forms of finance available so you can spot an appropriate opportunity when it arises.
Leasing
A prime example of this is leasing and asset finance. Leasing and asset finance could be seen as scarily alien to anyone starting out in commercial finance. In simple terms, leasing and asset finance for, and secured upon, any asset (other than property) owned by the business. This might be equipment, furniture, computers or vehicles – or any other of the fixtures and fittings of a business. Whether a business chooses to lease their assets of buy them out right often has a lot to do with the culture of that business and the individuals running it. There are some tax advantages to leasing (although with every successive budget these are gradually being whittled away) as assets leased under different kinds of contract can sit on or off the business’s balance sheet.
There are three basis product types: lease purchase (also called hire purchase) which is one of the simplest leasing options and allows the client (lessee) to own the asset at the end of the term of the lease; finance lease where the finance company (lessor) retains the asset at the end of the period but the client can still have the use of it for a peppercorn rental; and operating lease (including contract hire) which is similar to a true hire agreement – an asset is hired for a period and then returned to the lessor. Company cars are usually leased in this way.
The following example might help to illustrate when leasing might be a viable alternative. One of your clients would like to purchase a shop. Although you might be able to find a lender who would offer a large commercial mortgage which would fund all the business’s requirements, by being aware of the different options available it might be more appropriate for your client to take a smaller mortgage for the premises and leasing agreements for the various fixtures and fittings within the shop. This will give your client the flexibility to update these fixtures and fittings when he needs to, along with possible accounting benefits while the lease is in place.
Factoring
Factoring or invoice discounting is another kind of finance which a broker might want to consider for their client. Many businesses manage their cash flow by use of a bank overdraft, but if your clients’ customers are other businesses, factoring or invoice discounting might be a more flexible alternative, especially in the current market as banks are keen to reduce their exposure. Factoring and invoice discounting are both forms of invoice finance – the main difference between them is that with factoring the finance company controls the client’s sales ledger and with invoice discounting, the client maintains control.
Other than that the services are identical. Your client raises an invoice to their customer and sends a copy of that invoice to the invoice finance company. The invoice finance company releases up to 85% of the value of that invoice to your client immediately, whereas the payment terms of the invoice might have been 30, 60 or even 90 days. This gives the business the cash to keep trading while they wait for their customer to pay. On the receipt of the money from the customer, the invoice finance company then releases the final 15% to your client.
Although many businesses trade with an overdraft invoice finance can be more flexible in allowing a company to grow. Because invoice finance works based on the value of invoices raised, the size of the facility grows in line with the business. A relatively new product to the market which works in a similar way to invoice finance is payroll finance. Again this product is designed to support the business’s cash flow by minimising the impact of payroll funding – often a business’s largest expense. These facilities work by paying a client’s employees – then invoicing the client on 60 day terms offering a breathing space to ease cash flow. The old cliché is that cash flow is the life blood of a business. A business can make good profits but will still go under if its cash flow dries up. Invoice finance and pay roll finance can both help in this vital area.
Bridging
Bridging finance is another financial tool useful to any broker and, as a bonus, requires less specialist knowledge that the other services mentioned. Any broker who can write commercial mortgage business will also have the necessary skills to write bridging finance deals. Bridging finance is ideal when money is needed in a hurry. It is expensive so it’s important that your client has a planned exit from the loan – whether this is in the form of funds to be released from the client’s own reserves or a remortgage on to a commercial mortgage.
A client who has purchased a property at auction and needs funds in a hurry would be a good example of someone who could use bridging finance. Once the bridge was in place you would then have time to search for a suitable commercial or buy-to-let deal to pay the bridging loan back. Another example would be if the sale of one of your client’s properties was delayed but they still need to complete on purchase of another property. A bridging loan could cover the temporary gap until the first sale was realised and the loan could be paid back.
Of course being aware of these different options allows you offer your client a full service; whatever their problem, you can help them solve it. And each of these options means another income steam for your business too. This can only mean more business from your existing clients – a definite plus in a tricky market.
