As demand increases, opportunists are emerging and the pound signs within less credible lenders’ and brokers’ eyes are beginning to cloud their vision.
We’ve seen a lot of brokers, especially those with tightened cashflow, fail to act in the best interest of the client and uncover whether bridging finance is the right solution because their eyes are fixed on the five-figure commission tied to the deal.
As a National Association of Commercial Finance Brokers (NACFB) registered commercial finance broker, we never actively search for a suitable bridging loan if we feel it’s not the right fit for the client.
However, brokers aren’t actually required to be registered and therefore choose not to be – some bridging lenders don’t require them to be either.
This makes it more difficult for the cowboys to be penalised when failing to assess the needs of the client.
What I’ve noticed is that these sharks emerge when the client is in trouble and needs access to cash, fast.
Clients seek bridging finance because they believe it’s the only way to release cash within a short time frame, and some brokers take advantage and don’t challenge that.
However, by digging a little deeper, you can help the client see that it’s not always the best or only solution.
Sometimes, getting to the root of the problem and speaking with the external pressure behind the scenes can buy more time to place clients on a more cost-effective, longer term product.
Is it cost effective?
Bridging finance can often be the right and only solution, but it isn’t always cost-effective.
We need to be mindful that associated costs such as arrangement fees, legal fees, and valuations fees can be higher if you don’t take time to review a panel of lenders.
If you consider all these additional costs which need to be paid by the client, sometimes the only financial gain is to the less client-focused broker.
As a company with a conscience, I am often concerned about what happens to the clients we advise bridging finance isn’t the right option.
Do they go on to seek alternative advice from another broker? Does that broker decide to go ahead and offer fast cash?
In these circumstances, the poor customer could end up moving from lender to lender, accepting bridging loan after bridging loan, with no clear end in sight. Meanwhile, the broker sits with a nice five figure commission in the bank.
What can we learn from my panic?
Honest brokers will never allow a client to accept a bridging loan without an exit strategy. There has to be a rationale.
No broker should ever leave a client on long-term bridging finance, it’s unethical.
Professional brokers will always draw up an exit strategy that details when, how and which lender they will approach for longer-term finance if the sale of the property is out of the question.
Despite my concerns about the state of the industry, bridging finance can be and often is still the perfect solution if it’s completed ethically – especially now as we witness a rate war between lenders.
The beauty is the competitive nature of the industry means these rates will continue to be prevalent across the board.
What’s more, mainstream banks are beginning to offer short-term lending as a replacement for bridging finance to gain the upper hand, and the rates are far more attractive.
Naturally the transactions take a lot longer to complete, but it’s an alternative none the less and of course, in these situations we need to be mindful of service levels. If the client has a strict deadline, it’s highly unlikely a mainstream lender will meet it.
Standard applications take much longer with the bigger banks, sometimes even when the credit file is clean, the application can take months.
Private lenders, however, can often turn around half a million within a few days, but the speed of these transactions often comes with a high interest rate.
So, whilst the market looks promising, if there’s one thing I’d like to see in 2021 it’s more brokers and lenders becoming NACFB registered so those only after financial gain can be eliminated from the market.