Navigating the lending landscape

 

During the debt boom that led into the financial crisis of 2007 onwards money was plentiful and there seemed to be no limit to what could be financed. Financiers were fighting to underwrite the next big deal.

Working through the tough times that followed was challenging and lenders had to adjust to the ‘new normal’. Lending was no longer easy but would need to meet tough new profitability as well as credit criteria. Most borrowers faced frustrating conversations with their lenders.

Overdraft limits were cut, existing deals were renegotiated and new loans were no longer being approved. In the years following the market meltdown lending to large businesses has largely returned to ‘normal’. Banks have an appetite to lend and are again fighting over the best deals. However, feedback from smaller businesses is that they are not finding access to funding easy.

The landscape has changed. As high street banks retreated, space was filled by innovative alternatives – challenger banks, crowdfunders and small syndicates lending their own money. Alternative lending has exploded. According to the National Association of Commercial Finance Brokers, broker-led lending in 2015 increased by 31% to £15bn and “new types” of finance category are on target to reach £1bn for the first time. The great news for SMEs is that, once again, money is available, but the bad news is it is much harder to find. After more than a decade as a front-line banker, I watched the development of the market and made the decision to move away from working for a single finance provider and set up commercial finance broker Morgan Chex, which would support borrowers in navigating the maze that the world of finance had become. We provide access to finance through a lending panel of more than 250 providers, ranging from the familiar high street banks to crowdfunders, challenger banks and specialist lenders. Our offering is designed to cover most borrowing needs, whether they are a small business looking to buy commercial vehicles or property developer looking for a bridging loan. We feel this way we are able to guide the borrower towards the right type of lender and product, and not make compromising matches. Here are our tips on obtaining finance and developing a relationship with your finance partner:

• What is the money being borrowed for? Be clear about what you need and why. For instance, it is much easier for a financier to look at a request to finance an increase of a delivery fleet from two to five vehicles due to increased demand than a woolly request to support expansion cost during a growth phase of the company. Who controls and owns the business? Due to money laundering rules a lender will always want to get to the bottom of these questions. Don’t give lenders an excuse to say, “This is just bit too difficult, let’s move on to the next deal.”

• Lenders have different credit appetites but all habut all have one thing in common – they want to know how the monies will be repaid. A borrower’s ability to articulate how they intend to repay is paramount.

• What do you as the borrower stand to lose if all goes horribly wrong? Do you want to be able to walk away without a consequence or are you willing to ‘put your neck on the line’? This will make a real difference in cost, availability and terms.

• Be truthful and upfront about issues and challenges. There are lenders who will look at borrowers with difficult credit histories, but want to understand the circumstances. Hiding issues is not an option, as lenders will find out the truth in their due diligence and will not be sympathetic when issues appear at a later stage in the process. To quote a long-standing client, “Good news can wait, but make sure your financier is the first person to get the bad news.” The worst case is when bad news reaches the lender too late. Most lenders will work with a business when things go wrong, but if they are engaged too late, they have little sympathy.

• Negotiate, but not so hard to get put in the ‘pain in the bum’ bracket! Focus on what really matters, as most of the time winning in one area will mean sacrificing another.

 

Using a finance broker will not unearth the Holy Grail of equity priced like cheap debt, but will give access to more choice. Increased optionality and sources of finance are a positive development. Smaller lenders don’t have the complicated and expensive corporate structures. With a small investor, you often get to speak directly to the decision maker, and they have the ability to ‘take a view’.