The National Association of Commercial Finance Brokers (NACFB) is turning down more advances from new alternative lenders, writes Adam Tyler, chief executive officer at the NACFB.
Ever-lower interest rates are currently inspiring high net worth individuals to think laterally when considering their investment options. That means it is a relatively easy time to set up as an alternative lender.
The three things any such lender has to arrange are source of funds, means of accessing borrowers, and the interface to bring the two together.
The first of those has become easier of late, and a growing number of people have the technical knowhow to handle the third point, leaving just the second as a hurdle. Some of them see the NACFB as being able to help there, with the marketing and the overview data on the commercial marketplace.
Perhaps I am oversimplifying a little but the point is that an in-depth knowledge of commercial finance does not show up as a part of that trio of essentials, and we do meet lenders who have skipped that part.
Perhaps the thinking is that if the borrower knows what he or she wants, and is prepared to pay the going rate for it, then the lender need contribute only the cash to the whole process, rather than any creative thought or understanding. This is wrong; if a lender is asked: “What are you doing?”, then there has to be more to the answer than simply: “Lending you money!”
Their lending strategy does not extend much beyond middle man. This may work fine for a few months, but we ask them where their investors are coming from in 2018, or how well set up they are to deal with defaulters, or just borrowers with questions, and they do not know.
It seems some people believe all they need is a contact book full of high net worth individuals, and a little website-building skill.
New lenders approach us all the time, averaging between one and two per week, and of those, we look most favourably on those who have a banking background.
That is a fairly reliable guide to their understanding of the commercial marketplace. To be fair, a lot of lenders have exactly that background. They come from big established banks and have been there and bought, or funded the production of, the T-shirt.
Eventually, after years of seeing different ways of doing things in a big corporate style, they see ways to combine the best lessons of big business with the advantages of being a little bit smaller and nimbler, and take control of their own lending business. That is fine, but when all that background is missing, our due diligence hits a brick wall and we choose not to go further.
The headline is that the NACFB has turned down 41 patron applications in the past two years, a marked increase on the equivalent figure in 2013-2014.
This may be an attractive time to lend money, but as with any business, the lender needs to have a long-term plan for the future as well as a capacity to keep up to date with – and, to be candid, to understand – all the changes that are going on.
New alternative lenders sometimes believe that borrowers will flock to anyone opening up shop as a commercial finance lender. We see our role now as being a guide to which ones have the best history and the best future, and if you can’t find what you’re looking for among our 144 patrons, you’re most likely not looking hard enough!