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The NACFB is the only UK trade body dedicated to the commercial finance broker. We represent members from across the whole commercial finance market: from buy-to-let specialists and commercial mortgage advisers to vehicle finance brokers; from leasing and asset finance specialists to factoring brokers. All NACFB members comply with an industry recognised Code of Practice
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Tales of the unexpected
16th January 2008
Business Money
February Edition
Tales of the unexpected
The much publicised credit crunch has led residential mortgage brokers to dip their toes in commercial finance waters. But it’s not just brokers who are looking to diversify. Adam Tyler, Chief Executive of the NACFB, looks at some of the unforeseen effects from the credit crunch.
At an NACFB event held on HMS Belfast last year, David Whittaker from Mortgages for Business, stood up and said that the current contraction in the credit market could actually be good news for commercial finance brokers. He said that brokers would be in much better position to prove their value to their clients at a time when credit was harder to come by. For the purposes of elucidation the argument went something like this: In times of free and fluid credit markets such have been enjoyed in recent years money is, by definition, easy to get hold of and therefore (usually) cheap. Business owner managers have a good chance of being able to source a reasonable financial deal for themselves; so the benefits of using (and paying) a broker to source finance are more difficult to define. However, in times of a market contraction, money is more difficult to find and more expensive, so the business owner manager can see a benefits in using a broker to find the best deal for him. The ‘credit crunch’ does mean that experienced commercial finance brokers currently have to work harder than before to place deals; they are coming up against a few tightened underwriting criteria; they are at least have the advantage of knowing both that they can be placed and, more importantly, where.
At the Mortgage Business Expo held at Earls Court at the end of last year, many residential mortgage brokers were looking to expand their horizons to boost their income streams because of the problems in the residential mortgage market. Aside from the obvious issues of experience, and the fact that despite both markets having the word ‘mortgage’ in the title - that’s pretty much where the similarities end; it’s not a great time to consider starting out in commercial finance because of the reasons mentioned above. As any commercial finance specialist will tell you the commercial mortgage market is significantly different from the residential mortgage one. As an aside, it was interesting to see the reactions from many in the room during Mark Flower’s presentation on running a commercial finance brokerage when he said that there was no such thing as a commercial mortgage sourcing system. There were many sharp intakes of breath!
But it’s not just brokers who are looking to expand their horizons in these tougher times. Lenders are looking to ‘diversify’ too, at least in terms of their routes to market; and experienced brokers should benefit as lenders are now looking to brokers to provide more and more of their business. As an illustration of this fact, in the last two to three weeks we have had five applications for Patronage from lenders. Patrons are valuable supporters of the Association, and it is often by working with them that we work most effectively with our members. However Patronage applications are usually received on a one-a-month basis – so to receive five in two weeks is exceptional.
There have been well publicised victims of the current economic conditions; Northern Rock struggles on but other lenders have not been so lucky. Victoria Mortgages suffered the distinction of being one of the first UK lenders to shut its doors and not honour outstanding offers to clients, but there have been others. Most recently commercial lender 5D Finance withdrew from the market, although the official statement says that they will launch a new proposition in the New Year. Like brokers, lenders are finding that they need to diversify to survive; if not their product offerings, then the way they deliver those offerings to their clients. One comparatively inexpensive route to market is to get business introduced by brokers.
Although most lenders already have a broker channel, what has become apparent is that they are much more interested in fully exploiting this. And if you look at the logistics, it’s not hard to see why. Every individual broker represents a potential customer base made up of all of that broker’s clients for a lender. There are fewer brokers than brokers’ clients, so the team required to manage those relationships can afford to be smaller than a direct business channel. This means that the possibility of marketing to brokers offers a less labour intensive and therefore possibly more cost effective route to market, even if brokers’ commissions are taken into account, than for a lender to market to clients directly.
And the future? The key word which has been repeated time and time again is ‘uncertainty’. To paraphrase Donald Rumsfeld, there are a great many unknown unknowns. I would suggest though that the outlook is not a bleak as it’s often painted. Anecdotal evidence I have received from members suggests that the business is still there to be written, although business owner-managers’ understandable caution about the current state of the market means that it isn’t there in the quantities that it once was. But members are still writing business and interest from both lenders and residential brokers means that the market is still fighting – it not entirely fighting fit.
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