At present, only 14% of loans are placed by commercial brokers ‘ 80% of small businesses go through the big four high street banks, simply because they do not know where to find a reliable specialist broker. So, what should advisers be aware of before they start?
Creditability is fundamental. Borrowers are becoming increasingly sophisticated and look for their advisers to be appropriately qualified. New advisers should seek help from professional bodies such as The National Association of Commercial Finance Brokers (NACFB) and adhere to its professional code of conduct. The organisation was founded in 1992 due to an increasing call for self-regulation.
Commercial lending is often seen as a method of diversification for advisers that have built up their experience in other markets.
This is because it can provide a valuable new income stream. The average commercial loan is much larger than residential deals, and so fee income can be significant on a single transaction, with lenders paying introductory commission of up to 0.5% of the loan amount.
Finding your way
But networking is key. A successful commercial adviser will build a wide network of professional contacts including valuers, bankers, accountants, commercial insurance agents and so on. Commercial business is predominantly introducer led. Little can be expected to ‘walk in off the street’ and the better quality deals are typically introduced between professionals.
Repeat business is vital and successful advisers often hold a core of clients that consistently use their services and provide a large part of their income. Customer service is king and customer retention a must.
However, advisers must accept that abortive work is a common problem. Commercial clients are often familiar with using professional advice, so advisers may find they go to a lot effort with a client, only for the business to go elsewhere. New clients can utilise an adviser’s service to negotiate a better deal from their existing bank. This can be compensated for by an upfront fee, but in an increasingly competitive market this can prove difficult.
The competition is fierce. About £80bn of loans are made each year for commercial property mortgages, with a massive £300bn currently outstanding. It is difficult to be precise as to how many commercial brokers exist, as many are individuals working alone. Within Bank of Scotland Specialist Property Finance ‘ the merged business of Birmingham Midshires Commercial and Bank of Scotland Business Banking property teams ‘ the largest 2,000 brokers are specifically identified for marketing purposes, but significantly more relationships exist on a more informal basis.
Unlike many sectors, technology only plays a relatively limited role in commercial lending at the moment. It was hoped by many in the industry that the internet would create opportunities for all players in the commercial market. However, this watershed has, for the moment at least, failed to materialise.
However, the property industry has not escaped the onslaught of the internet altogether and it will go through some of the biggest changes it has ever experienced in the next few years. Many people think the internet is email or vice versa, but they are likely to be surprised by the range of uses the internet can be put to in relation to the property industry.
So what are these uses and what will change? They include e-pronouncement, e-listings, e-finance, e-transactions, e-collaboration and e-management. These applications will fundamentally change the way business is done.
But the vast bulk of all commercial lending via advisers is done the old fashioned way ‘ face to face over a pot of coffee. It is a tried and tested formula that is highly unlikely to change in the near future. Maintaining, developing and manipulating these relationships is a key factor for the successful adviser, who will understand the preferences of a number of lenders, and know how each lender likes information to be presented and the sectors to avoid for each lender.
Commercial lending is all about bespoke, or tailor-made treatment. One of the greatest strengths of an adviser is knowing exactly where to place a particular loan to gain the best rate and terms for each client. Terms can vary significantly from lender to lender on the same deal.
This is not the only reason why advice is key to a successful commercial mortgage application.
Many small businesses do not have the time, manpower or ability to shop around to find the most advantageous deal. Ambitious small and medium-sized enterprises often find their expansion plans hindered by difficulties in securing a suitable commercial mortgage.
A diverse market
And the very nature of small and medium sized business is diversity ‘ it is not a sector, which can easily be pigeonholed. Two companies may have similar turnovers, but how can you compare the business dynamics of a hotel to that of a motor dealer? Each has its own unique risks and opportunities.
It is for this reason there is very little in the way of standard pricing or terms in the commercial finance market.
Markets can also fluctuate rapidly and therefore what was considered a low risk last month may be different today. Industries as diverse as travel, agriculture and transport have all seen major changes to their markets in recent months, with everything from foot and mouth disease to atrocious weather conditions having an impact.
Therefore if businesses are so different, it follows that their borrowing needs are too. Advisers must be in the position to seek out bespoke solutions, tailor them to meet their clients’ needs, and ensure they have thoroughly investigated their network of lenders.
So how is the commercial mortgage market changing?
The risk management business becomes more inventive and comprehensive every day ‘ and as a result there is an increasing use of financial instruments to mitigate risks, for example interest rate hedges. Until the recent hardening of world markets, interest rate margins were on a downward trend. This is highly likely to continue when stability is restored.
Price transparency is also emerging, more banks are now committed to changing the face of business banking by establishing interest on business current accounts and high value savings accounts for the business community.
Advisers need to be aware that the fog of commercial banking is lifting and their challenge is to ensure their professional networks are strong, their service levels high and they consistently deliver clear value for money.
So are you rushing off to set up shop or heading for the exit? There is no simple answer to whether the commercial sector holds riches or woes for new brokers. Like any business it is often down to the individual. Drive, depth of knowledge and customer care, plus a little luck are the same ingredients for any business venture.
Remember that no one wants a broker because no one actually wants a loan ‘ they only want what the loan can buy.
Peter Townsend is director of Bank of Scotland Specialist Property Finance
Networking is vital with most leads coming from fellow professionals.
Businesses shop around so advisers must prepare for an element of abortive work.
Products are tailor-made for each business, with little standardisation of pricing or terms.