The commercial mortgage market has long been a tempting target for residential mortgage brokers who plan to expand their horizons. The principles behind both markets are roughly the same: a client is looking for a loan which is secured on a property. But that is really where the similarities end. Residential mortgage brokers who enter the commercial finance arena need to be aware of the differences and the specific challenges that both advising clients, and arranging commercial finance can bring.
Traditionally, commercial mortgage brokers came from a business banking background. This is because business bankers understand business finance and also know what a lender is looking for from a business. Despite having no broking experience, some commercial bankers find the leap to commercial broking easier than a residential broker might, simply because of the differences and challenges in this market.
It should also be pointed out that the challenges currently faced in the residential market are also abundant in the commercial one. Although you may have clients asking you for advice on commercial property, translating that into income might be more difficult than you think. The stresses in the market mean that lenders are reluctant to lend to any business that is not a dead cert, in terms of risk; and many experienced brokers are finding that although they are still getting plenty of enquiries, they are able to place very little of what comes across their desk.
No products
This is usually the first shock to the system. Commercial mortgages are priced according to the risk of each individual deal, usually by adding a margin to a given base rate, either the Bank of England base rate, LIBOR or the Finance House Base rate, so it is important for a broker to keep abreast of what lenders in the market have to offer.
For a beginner, there are specialist publications available, which list commercial mortgage lenders and the types of business they will consider lending on. These include The Finance Book, Business Moneyfacts and Business Money. They also give a rough guide to the maximum and minimum margins these lenders charge, along with typical fees that the client will need to pay.
Although useful, these publications can only act as a guide, as there are so many variables involved in each transaction. Brokers entering this market will still need to make contact with the business development managers from different lenders in their area to make sure they keep a good knowledge of the rates and terms available. And current trading conditions mean that these managers change regularly.
Sourcing systems?
The result of the ‘no products’ point above, is that there are few ‘sourcing systems’ either, although The Finance Book has recently launched a free, online version of its data which brokers can use, while an enterprising NACFB member has recently launched a comprehensive system, and eMoneyfacts also offers a commercial mortgage search.
However, none of these produce ‘rates’ or ‘products’, simply an indication of the lenders that a broker needs to speak to who would consider the kind of proposition the broker has in front of them. So whereas a residential mortgage broker can use a system to advise their client from the outset of the kind of rate they will pay, a commercial finance broker will have to rely on their knowledge and skill within the market to give an idea of pricing.
No income multiples
Another reason for there being no sourcing system (and an explanation as to why the specialist listing publications can only act as a guide) is the way that risk is assessed for a commercial mortgage deal. In other words, the way a lender calculates whether they are willing to lend, and if they are, at what rate they are willing to lend.
Whereas for a residential mortgage, the terms are usually fairly straight forward (three times joint salary up to 85% loan to value, for example) for a business proposition, there is the need to be able to read and assess accounts and balance sheets, assuming a business has one, put together a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and look at and evaluate business plans as well as assessing the experience of the business owner manager as it is largely his experience and skill which determines whether the business prospers or fails.
Is the client looking to purchase just a property, or are they looking to buy a going concern? Has the business been valued as well as the premises? A bank will need to know all these things to assess the risk and rate of interest for lending to the client.
A bad decision, or bad advice, could mean that a business goes under, with all the attendant repercussions for the owner, his or her family, and any employees caught in the crossfire. But for brokers willing to make the commitment to put in the hours the rewards are there. And there is help and support available so you do not need to do it alone. n
Adam Tyler, chief executive of the National Association of Commercial Finance Brokers
