Much of bridging’s recent success as a growth sector can be attributed to a single fact: that the mainstream banks are not lending at the same levels as pre-2008.
The reasons are well-documented – the need to ‘de-toxify’ balance sheets; new capital adequacy rules; tighter regulation – but continue to divide opinion. Bridging lenders have been the beneficiary as businesses and consumers search for alternative forms of finance.
That the banks are not lending is not in doubt. Recent findings from the Bank of England (BoE) reveal that lending to companies fell by £1.2bn in August 2012 – down 3.2% on the year – and that the growth in credit being made available to UK businesses has been in negative territory for more than three years.
Borrowing costs also remain stubbornly high despite the high profile launch of schemes such as Funding for Lending intended to make borrowing easier and cheaper.
The average spread over Bank Base Rate (0.5%) on business loans valued at less than £1m is now 3.36% compared with an average of 2.64% between 2008 and 2011.
Among businesses, confidence and awareness of what the banks can do for them remains low. In a recent survey conducted by the British Chamber of Commerce, 50% of companies said they ‘mistrust’ the banks and 40% are not confident they could secure finance from external providers. Faint praise indeed.
For their part the banks argue it is not their task to finance high-risk ventures, that demand from creditworthy companies remains low, and that tighter regulation is forcing them to hold cash back.
The authorities – the government, the BoE and FSA – counter that banks should not use sensible and necessary regulatory change as a reason not to lend. Whatever the rights and wrongs, the effect is the same: funding is scarce, relatively expensive and difficult to obtain from mainstream lenders. But will it continue?
It has been something of a given that the banks will return to lending in the future, though when this will be is a matter of debate, with anytime between eighteen months to five years being the commonly-held view.
However, bank lending as we have known it is unlikely to return within the foreseeable future and that ‘now’ is the new ‘normal’ as far as the big banks’ approach to lending goes.
This environment is one where alternative, more flexible forms of finance, such as bridging, become an integral part of the new lending landscape. Borrowers are waking up to the fact that existing banking relationships now count for nothing leaving brokers supremely well-positioned to sell access to short-term funding to the growing community of newly-marginalised small businesses, property investors and developers.
To succeed in this new world, lenders need to fulfill certain criteria. First and foremost, they must be well-funded.
Second, their products must be attractive and competitively priced. Third, they must have a suitable distribution strategy. And fourth, they must achieve the correct risk-reward balance. Significant and sustained failure in any of these areas is certain to bring about an early market exit.
Given the opportunities offered by bridging we can expect to see more lenders enter in the coming months and years.
Some will be opportunists looking for short-term success and reward. Others will choose to specialise in niche areas that complement their particular business models, such as high-value loans or mezzanine finance.
But any lender with serious long-term ambitions must build a sustainable and reputable proposition if they are to survive in an increasingly competitive environment. Not all will succeed.