Issue 74 OCTOBER 2019
Broker COMMERCIAL
The award-winning magazine for the National Association of Commercial Finance Brokers
20 KNOW YOUR SCOPE The Shakespearean nuances of regulatory reach
34 LENDING IS EVOLVING Future value will take different forms
Beyond borders The world wants UK goods and services
36 AFTER THE GOLD RUSH The pressures to release more land for developers
52 CROSSING THE FINISH LINE Qualifying in a strong starting position
Contents
In this October issue NACFB News
Special Features
4 6 8
11 12-14
Note from Graham Toy Updates from the Association Lloyds: Sustainability in business Industry news round-up Patron news
24-25
26-28 30-31 32 34-35
36-37
Central Bridging: Valuing valuers NACFB: Exporting is great Investec: Resilient asset sector Spotcap: Agile credit files Atom Bank: Principles of lending LendInvest: Unlocking land
Industry Insight 38-39 40-41
Savills: UK property shifts Chartered Institute of Marketing: Hitting the right note 42-43 ThinCats: Securing a regional foothold
Opinion & Commentary
18
44
46 48-49
Case Study
50
16
52-53
Credit4: Secured business funding
Patron Profile 18-19
54
Byford Commercial Finance: Stand and deliver Oblix Capital: A new career Black Arrow: The evolving asset space Hadrian’s Wall: Pulling up the ladder Maslow Capital: Crossing the finish line Five minutes with: Liza Campion, Head of Key Accounts, Precise Mortgages
Regency Factors: Deals over tea
33 Eastcheap | London | EC3M 1DT Kieran.Jones@nacfb.org.uk LAURA MILLS Graphic Designer
33 Eastcheap | London | EC3M 1DT Laura.Mills@nacfb.org.uk
MACKMAN Design & Production T 01787 388038
Ask the Expert
KIERAN JONES Editor & Feature Writer
Magazine@nacfb.org.uk
20-21 NACFB: The Bard of broking
Russ Lewis: Leading from the front
Further Information
MAGAZINE ADVERTISING T 02071 010359
Compliance Update
22
48
30
mackman.co.uk
NACFB | 3
Welcome
Graham’s Note
W
elcome to our October issue. I hope you will find some content that will help keep you informed as well as help you run your business. We are fast approaching our AGM and this is a good opportunity to highlight the changes we have undertaken to generate a higher degree of engagement with this important event in our calendar. We have departed from the traditional – and arguably slightly dated approach – to a hybrid version of the meeting. Whilst the event is being held at The Royal Society of Medicine in London, Members can also join the activity live through an online webinar. This means that our Members will have the opportunity to fully participate without having to be physically present. Using live streaming you will be able to hear the presentations as well as ask questions, so I am hoping that Members will join from all corners of the UK.
Graham Toy CEO | NACFB
You will have heard that this magazine succeeded at the Trade Association Forum Best Practice Awards. As we head towards the end of the year and our first year as an in-house publication, I am delighted with how the magazine has become more seasoned with every issue. Whilst one of our early concerns was the volume and quality of content, I am delighted with the flow and stock of articles which are becoming more diverse and relevant to all our stakeholders. The whole enterprise would not be possible without the support of a range of advertisers who, I am sure, are exhibiting a greater confidence in the publication – if the volume of new advertisement applications is anything to go by. Please remember that, as a Member organisation, this magazine delivers an excellent forum for our stakeholders to contribute and share their views. Finally, please take a look at some of the pieces featured in this month’s publication. We feature international trade and whilst Brexit might have the ability to cast a pall over cross-border activity, this content reinforces how Member’s and Patron’s activity is a vital component for a successful trading nation. Savills pass a lens over the commercial property world analysing the trends and influences on a key asset class in our sector. You will also be introduced to Russ Lewis a nonexecutive director of the Association, who brings strong strategy and leadership skills to the organisation from a career in the armed forces.
4 | NACFB
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Long-term partners Our relationship managers are here to offer expertise and specialist advice about invoice finance and business planning. We really get to understand the nuts and bolts of your clients business and their ambitions.
Flexible funding that matches ambition We understand that no two businesses are the same and that flexibility can help your clients business to stay nimble. We can provide a facility that will evolve to meet business aspirations. Putting your clients in pole position for growth.
We can offer Factoring, Invoice Discounting and Asset Based Lending, which could help you release the cash value held in your existing assets.
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NACFB News
Association updates for October 2019
NACFB announces 2020 subscription freeze ahead of hybrid AGM Annual General Meeting to run in-person and live online For the first time in the Association’s history, this year’s NACFB Annual General Meeting is to be held concurrently; both in-person and streamed live online via webcast.
a record-breaking and award-winning year. This document also provides all Members with a formal meeting notification and complete AGM agenda together with an absentee proxy voting form. You will also see that the last year’s accounts and meeting minutes are provided alongside a review of the first six months of our findsmefinance platform.
This year our physical AGM will be held from 2:00pm until 4:00pm on Thursday 21st November at The Royal Society of Medicine, 1 Wimpole Street, London. All NACFB Members and Patrons are welcome to attend, with all full NACFB Members entitled to vote on the proposed resolutions.
The Association has proposed five resolutions to be voted on at this year’s AGM. These include a freezing of all subscriptions for Members and Patrons in 2020. This is the second year in a row without increase. Members will also be asked to approve changes to the Articles of Association to enable both the CEO and MD to be appointed as Board Directors.
We chose The Royal Society of Medicine as a location because the facilities available contribute very well to the desire to change the format of the AGM, allowing as it does, more of our membership to engage with the event.
Graham Toy, NACFB CEO, said: “Whilst we want to see as many of you as possible at the venue for this year’s AGM, I also hope that this initiative will enable Members from across the country to feel more included and consulted.
This year, the Association will also be running the meeting as a hybrid event, meaning that it will be streamed live online via webcast. The webcast will allow Members to watch live and submit their votes at the same time as those in the room.
“We are pleased to be in a position to freeze all subscriptions, for both Members and Patrons, for the second year running. As a not-for-profit, it is important that all the revenue that we generate is put back into the business for the direct benefit of those who support us,” he added.
All NACFB Members should by now have received a copy of the NACFB Annual Report, Accounts & AGM Agenda 2019. In this document, key members of the Association’s team reflect on
All NACFB Members and Patrons can sign-up to attend, either in-person or via the free online webcast, by visiting: bit.do/2019AGM
6 | NACFB
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Note from our Sponsor
Sustainability means business Being sustainable can bring business benefits beyond doing something good for the environment. We look at the reasons why businesses should go green and how we can help
Andy Bishop UK Director of Business Development, SME Banking Lloyds Bank
U
K businesses currently produce a fifth (18%) of the nation’s greenhouse gases. But with the drive towards zero net carbon emissions by 2050, many are already putting in the work to reduce their impact on the environment – and reaping the added benefits it can bring. As well as the obvious environmental impact, making efforts to become more sustainable can have added benefits for businesses, including: • • • • • • • •
Innovation and being more competitive Improved efficiency and increased productivity Recruitment and retention of talent Regulatory compliance Motivated and engaged employees Consumer choice and brand value Cost savings from a reduction in the use of resources Improved reputation among stakeholders and shareholders
Tips for becoming more sustainable
• • • • • •
energy-saving initiatives for maximum impact. Create clear targets of what you want to achieve and by when – make sure they are realistic and clearly communicated to the full team. Appoint sustainability champions – members of the team who can help spread the sustainability message at all levels and help manage green schemes. Cut down on business travel, where possible. Make use of video conferencing rather than face-to-face meetings and encourage staff to work from home some of the time to cut down on commuting. Review your suppliers – and make sure you’re working with companies who can help you identify ways to reduce packaging and waste. Update your equipment – make sure it’s as energy and water efficient as possible. Ban single-use plastic and invest in reusable water bottles and coffee cups for staff.
How we can help businesses be more sustainable We’re committed to helping businesses of all shapes and sizes become more sustainable. We’re supporting the shift towards sustainable business models and operations, and to pursue new clean growth opportunities.
Getting started with sustainability can be challenging: 90% of companies could still benefit from putting a proactive strategy in place to reduce waste and become more efficient. These tips can help your clients, and you, take steps to become greener:
As part of these efforts we’ve made sustainability one of our key decision-making criteria for all lending applications to ensure that relevant risks and opportunities are considered. We also provide useful guidance aimed at helping businesses become more sustainable, which can be found at lloydsbank.com/insight
• Carry out energy audits on your business premises to see where energy is being wasted. This can help you focus your
Contact us to find out more about helping your clients with their sustainability plans: Lloydsbank.com/businessintermediaries
8 | NACFB
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Industry News
Industry News 3. Bank Referral Scheme helps fewer than 800 firms The Bank Referral Scheme is helping fewer than 800 companies a year. Figures from the Treasury show that the programme led to 796 companies being lent £16 million in the 12 months to June 30. The data shows that fewer than 1,700 businesses have been assisted – to the tune of a combined £32 million – since the scheme was launched in November 2016, with around one in twenty companies referred via the scheme securing finance.
1
5 5. MPs call for action to keep banks in towns MPs have urged ministers to force banks to commit to keeping at least one local branch open in towns across the UK. In a new report, Westminster’s Scottish Affairs Committee recommends introducing legislation if banks refuse to provide such a guarantee. According to official figures, over the past eight years banks in the country have shut 445 of their local units.
1. BoE may be forced to loosen policy, says Carney
6. HMRC urged to clarify customs guidance
The Governor of the Bank of England has warned that monetary policy may have to be loosened to help the economy in the event of a no deal Brexit. However, Mark Carney, speaking at the Federal Reserve Symposium, added that there were limits as to how much the economy could tolerate a rise in inflation caused by a falling pound.
The Federation of Small Businesses (FSB) has called on HMRC to clarify Brexit guidance over concerns that existing advice is misleading. Letters sent to almost 90,000 companies which trade with the EU have added to uncertainty over Economic Operators Registration & Identification (EORI) numbers – the customs identification code that businesses will need to continue trading with the EU if Britain exits the bloc with no deal in place.
2. Barclays boss concerned by challenger compliance Barclays’ head of consumer banking and payments has warned that compliance concerns around challenger banks risk “…creating a bad name for the banking industry”. Ashok Vaswani said that concerns around the ability of start-ups to automatically monitor transactions are ‘dangerous’ for the sector. “At the end of the day, the whole system is only as strong as the weakest link,” the executive said.
4 4. Construction industry output drops to a decade low
7. Borrowing falls to two-year low
Britain’s construction industry suffered its sharpest decline in new work in more than a decade in August, with clients delaying projects as they await clarity over Brexit. The IHS Markit/CIPS UK construction Purchasing Managers’ Index (PMI) fell to 45, from 45.3 in July, below forecasts for 45.9, and below the 50-mark separating expansion from contraction.
Lending to UK businesses declined by £4.2 billion in July – a two-year low – driven by a £2 billion net repayment by businesses to banks. The annual growth rate of bank lending to UK businesses fell to 3%, down from 4.4% in June. The growth rate of borrowing by large businesses fell to 4.2% but for small businesses it was unchanged at 0.8%. NACFB | 11
Patron News
Patron News ThinCats: 30% of businesses have never sought advice on external funding
Precise: Fifth of landlords set to add HMOs to their portfolios in 2020
Following Small Business Advice week, ThinCats, is urging business owners to take advantage of the UK’s growing community of professionals advising on alternative finance.
Research from Precise Mortgages shows the Houses in Multiple Occupation (HMO) sector is set for further expansion, with more than a fifth of landlords (21%) who are planning to buy over the next year looking to add HMOs to their portfolios.
In research carried out by the NACFB lender Patron, when asked about the type of company SMEs had used to advise them on external funding, 30% of businesses stated they had never used an adviser. Of those that did receive advice, 22% used an accountancy firm; 21% used a corporate finance adviser and 20% used a commercial finance broker. The research, which surveyed 512 UK SMEs with between 10 and 249 employees, also shows 30% of SMEs who were rejected by their first-choice lender, stopped searching for external funding altogether. This suggests that many businesses, of whom 55% said high street banks were the first lender approached, are potentially giving up when there are suitable alternatives available. Positively, appetite for lending remains high with more than a quarter of businesses (27%) saying they applied for funding within the last year. Damon Walford, ThinCats chief development officer, said: “Given the double whammy of a global economic slowdown and Brexit, it’s quite likely that banks will rein in their funding for SMEs even further.” 12 | NACFB
HMOs are proving to be an attractive proposition in a time of market uncertainty, with HMO landlords achieving the highest average rental yields at 6.3% compared with the market average of 5.5%. The research shows average rental yields across the market as a whole are at their lowest for nine years, highlighting the attraction of HMOs. Landlords with between 11 and 19 properties are earning the highest average yields at 5.9% with the North West the best area of the UK for yields, earning an average 5.9%. Blocks of flats are also set for growth, with 8% of landlords planning to buy compared with just 5% planning to divest. Alan Cleary, managing director of Precise Mortgages, said: “To help landlords explore new opportunities, we’ve extended our top slicing feature across our entire Buy-to-Let range. It means landlords can now use their surplus HMO income for future property purchases to expand their portfolios.”
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Patron News
Patron News Esme Loans: Patron increases maximum loan amount to £250,000
Ultimate Finance withdraws from the unsecured loan market
Esme Loans, NatWest’s standalone digital lending platform for SMEs and scale up businesses, has announced that it has increased its credit appetite with the maximum loan amount moving to £250,000 from £150,000 enabling them to support more small UK businesses than ever before.
Ultimate Finance has announced a strategic refocus of its product portfolio as it withdraws from the unsecured loan market to concentrate on further investment in its range of core asset-based solutions.
The NACFB Patron, which to date has lent over £70 million to UK businesses, has seen a sustained period of rapid growth in lending to small businesses with their most recent milestone representing over £20 million of lending in the space of 14 weeks, an increase of 40% to the lender’s total loan book. At its current trajectory, the provider will have reached lending of £100 million by Christmas. Commenting on the credit increase, head of NatWest Ventures, Andrew Ellis said: “Following a sustained increase in demand for Esme Loans, we have listened and engaged with our customers and are increasing the amount we can lend, so that we can support more customers in response to their evolving needs. “The digital application and rapid end processing are resulting in more UK SMEs choosing Esme Loans to grow their business. We will continue to invest in our products, processes and technology to ensure that this continues.” 14 | NACFB
The decision enables a full focus on growing its market-leading Invoice Finance, Asset Finance and Bridging products, and aligning its depth of offering into bespoke structured solutions suitable for individual client needs. Unsecured loans will no longer be provided on a standalone basis, although clients will continue to have access to cashflow loans alongside Ultimate Finance’s secured products. Ultimate Finance will continue to support and service existing unsecured loan clients until the end of their facility. Commenting on the move, Josh Levy CEO of Ultimate Finance, said: “We are committed to ensuring that our structure and strategy allows us to be responsive to market conditions and positioned to capitalise on our growth potential. “By no longer offering standalone unsecured loans and solely focussing on asset-based lending, we are prioritising our core strengths and ensuring that our market proposition is clear and concentrated on our specialist areas of secured lending. We are committed to continuing to provide our clients, including those with existing unsecured loans, with high levels of service enabled by technology.”
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Case Study
Easing the burden for broker and client Securing business funding for borrowers that need access to longer-term finance Gary Trott Chief Executive Officer Credit4
A
professional couple acquired a guest house with a view to repositioning it as a premium multi-channel hospitality offering. Their business in the hospitality sector had been reliant on high-cost forms of finance to fund the improvements and refurbishment of this seasonal business, as the trading history of the business was fairly short, albeit trending positively. Over time, they found the high-cost debt was suppressing their cashflow, which was felt particularly acutely during the off-peak season and preventing re-investment of surplus cash. As a result, their business growth plateaued. The company were looking for working capital for refurbishment and to continue with their plan to open new hospitality offerings at the property. They worked with their broker, Samantha Thorpe of Premier SME Funding – a trusted and long-standing broker of ours, to investigate possible solutions to help ease the burden and who subsequently introduced the business to Credit4, having been made aware of our new Secured Business Funding product. Credit4 regularly work with Premier SME Funding and they know that the products we offer are flexible, straightforward and transparently priced. Samantha said: “For me, it’s great as Credit4 take the case on and liaise directly with the business, freeing me up to work on new business. In this particular case, my client was delighted with the support that he received, allowing him to continue to grow his business.” We were able to see that a very good solution in this case would be to consolidate the company’s existing high-cost debt using our Secured Business Funding product. Secured Business Funding launched earlier this year and is designed for growing SMEs who need access to amounts of between £75,000 and £250,000, for terms 16 | NACFB
of between twelve months and five years, ideal for businesses that need access to longer-term finance or to release cashflow where it is being suppressed by servicing existing high-cost debt. The funding is unsecured against the business, backed by personal guarantees from the Directors of the business and a charge against a suitable property of a personal guarantor. We provided the company with a £116,000 loan at 80% LTV, based on a 180-day valuation. The LTV available allowed the client to raise the funds they needed to expand their business and refinance shortterm, high-cost debt, easing the associated cashflow burden and thereby releasing further working capital into the business. As with our Flexible Funding and Dual Growth Funding products, Secured Business Funding was launched after listening to feedback from our broker community. We are delighted to see the product being well received and our team are committed to ensuring both introducers and clients have the support they need.
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The LTV available allowed the client to raise the funds they needed to expand their business and refinance short-term, highcost debt, easing the associated cashflow burden and thereby releasing further working capital into the business
Patron Profile
Northern hospitality, national coverage All our deals start with a non-obligatory meeting over a brew
Rachel Craft Marketing Manager Regency Factors
R
egency Factors was established nearly 30 years ago with the mission to support UK SMEs with invoice finance they need to flourish and grow. During the past 30 years we have helped businesses with financial support so they can expand and thrive, saying yes when others have said no. We have grown significantly, establishing ourselves as one of the few remaining independent invoice financiers in the UK. Building on the good old-fashioned hard work and know-how from our team, we aim to continue our growth and remain focussed on providing a seamless service to turn our client’s ambitions into reality. When a deal comes to us, our team gets to work on getting it paid out. Our administration department, headed up by Debbie, gets started on verifying invoices and setting up the documentation needed. Liz looks after credit control, and her expert team chases invoices on behalf of our clients. Paul and his team of client managers look after all our clients, liaising with them daily regarding their account and cashflow requirements. Brokers are usually in touch with our sales team and Lynne, who ensures that commissions 18 | NACFB
are paid on time and that we are all in the right place at the right time. Usually a deal comes to us and we arrange a face-to-face meeting with the business owner to discuss the finance available to them. The key being that we can understand what the business does and
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The SME lending market has changed markedly since the financial crisis due to the required structural changes within mainstream banks, which has led to the removal of locally based decision makers and the increased use of algorithms to make funding decisions
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Good funding is more than fast cash to clients, now it’s a real relationship that help businesses survive and thrive
how it does it. As no two businesses are the same, we are clear on what is needed from the outset at this meeting.
removal of locally based-decision makers and the increased use of algorithms to make funding decisions.
Once a broker’s client is set-up with us and the first payment is made to them, a dedicated client manager and experienced credit controller are assigned to our new client, and we can start looking after the sales ledger of the business. We make payments on invoices within 24-hours of receipt and collect on those invoices according to the credit terms provided to the customer.
Looking ahead to 2020, we expect that the amount lent to SMEs via an online platform will increase, as will the number of providers operating solely online. The transition to newer forms of lending, such as equity crowdfunding and P2P lending, will also march on. This is due to the increased reliance on technology available to SMEs and their owners.
Business owners quickly get the cash they need to run their businesses without having to wait months or chase invoices themselves. A client of ours has been able to expand their business to Europe and the US, as they have been able to fulfil orders, they were previously unable to. SMEs are widely seen as the backbone of the UK economy, accounting for 99.9% of private sector businesses and 60% of private sector workers. Almost half of UK SMEs have experienced barriers in accessing finance from mainstream sources. Many growth orientated SMEs are looking to alternative sources of funding to a bank loan or credit card to fund their ambitions. The SME lending market has changed markedly since the financial crisis due to the required structural changes within mainstream banks, which has led to the
We have recently strengthened our business development team and we aim to increase growth throughout 2020, increasing the amount we lend to the UK SME market. Our aim is to continue serving our brokers and clients with the professionalism and expertise they expect from us. As a specialist SME lender, we can extend credit to SMEs with a more modest financial performance and those with more complex requirements. Usually, we can support something which banks are unable to accommodate. At Regency, we strive to work in partnership with our brokers throughout the process of an invoice finance deal with us. The dynamic between lenders and brokers is changing. It’s all about relationships and working together to provide the best service to customers. Good funding is more than fast cash to clients, now it’s a real relationship that helps businesses survive and thrive. NACFB | 19
Compliance
To be, or not to be, that is the question Unpacking the full scope of credit broking permissions
James Hinch Compliance Consultant NACFB
I
t may not be the most appropriate way to begin an analysis into a piece on regulation, but it is curious that there are quite a few quotes from Hamlet that dovetail neatly into the wider debate around whether a broker should be regulated or not. We often provide our Members with guidance on this potentially confusing area, thus ensuring that we help protect their businesses. The question that we want to unpack is about whether a broker should be regulated or not. Many of you will remember that back in April 2014 the Financial Conduct Authority (FCA) took over the regulation of Consumer Credit and this change resulted in credit broking coming under the spotlight. In simple terms, a broker who deals with sole traders and partnerships of three or less is viewed as dealing with individuals and must possess credit broking permissions from the FCA, and is therefore deemed to be regulated. By contrast, if a broker deals only with limited companies then generally, those potential borrowers fall out of the scope of the Consumer Credit Act and the broker does not need to be regulated. These are unregulated brokers. The situation therefore looks clear cut. Perhaps another quote from Hamlet will provide the link to how this subject can become more nuanced: “We know what we are but know not what we may be.” The challenge that many in the industry now face is how to address a range of transactions which may not fit neatly in these clearly defined boxes. Whilst brevity may be the soul of wit, the situation remains complex and with interwoven subtleties. Below are some examples below that explore this further. • Bard Brokers do not have credit broking permissions and are therefore viewed as unregulated. These firms say that they only deal with limited company clients and if presented with an enquiry from a sole trader, they pass this on to another broker who has the required permissions. Surely then, this broker falls within the spirit of the regulations? Absolutely not. Without credit broking permissions, a broker is not authorised to place a deal with another broker for a regulated party, especially when this is by way of business. • Shakespeare Commercial also do not have credit broking permissions and therefore view themselves as unregulated. Their client, XYZ Ltd changed their mind at the eleventh hour regarding a vehicle for their property purchase and decided they wanted to borrow in the names of the three directors instead. As the broker’s
main client relationship is with XYZ Ltd, it felt alright to continue with the arrangement with the lender, which by now was in the advanced stages. Alas, this also is not acceptable as it would then constitute an irrecoverable loan which could place the lender in a very unpleasant situation if the borrower defaulted or contested the loan. • River Avon Bank open their doors to commercial lending, deciding that their route to market is via the broker market. They are very concerned about compliance and therefore insist on all panel brokers having credit broking permissions – irrespective of their client base. This is where the debate becomes even more challenging. From the lender’s perspective, this is a safe place to be, because it should protect them from inadvertently acquiring an unenforceable loan. However, there will be broker firms who are prepared to apply for credit broking permissions to gain access to the panel, but who genuinely do not deal with individuals. In these cases, they may experience difficulty in gaining permissions from the FCA. Having presented some examples, I think this last quote from Hamlet might help frame some current thinking: “There is nothing either good or bad but thinking makes it so.” A broker with credit broking permissions has passed muster with the FCA. This quality assurance will provide a level of comfort to stakeholders who deal with that entity. A broker who has no credit broking permissions, and is referred to as unregulated, may not have the FCA seal of approval, but if it is not required, or will not be granted because of the type of work undertaken, they should not be viewed as any less professional in their arena. The challenge is how those who partner with unregulated brokers view the risk of involvement in future regulated transactions, either wittingly, or otherwise. Regulated and unregulated brokers can join as Members of the NACFB. Both cohorts are subject to the same degree of due diligence when joining us. For everyone’s protection, we look carefully at the business processes of unregulated applicants to ensure they understand and apply an appropriate approach to their clients. This is coupled with an understanding of the restrictions that are created by the absence of credit broking permissions.
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“We know what we are but know not what we may be”
NACFB | 21
Ask the Expert
We need leaders, now more than ever
Q Russell Lewis MC Specialist Board Director NACFB
What does leadership look like?
To paraphrase and contemporise Field Marshall Slim, there are no good businesses or bad businesses; there are no good teams or bad teams; there are only good leaders and bad leaders.
Why do we need strong leaders?
The globalised world is a complex and interlinked system that creates challenges for leaders at every level. We are currently experiencing a particularly turbulent period in global history. In recent times there have been numerous events that shine a light on global leadership; or lack thereof, and its inability to prepare for such challenges. Every society, every organisation and every business needs good leadership now more than ever. We face turbulent times and unknown challenges and its only good leadership; from everyone, at every level, that is going to get us through it.
How would you define strong leadership? There are myriad definitions of leadership and it is important that you 22 | NACFB
&
find one that resonates most strongly for you. Find one that really works for you, or better yet, take the time to create your own. I spent a lot of time reflecting on all my leadership experiences, both good and bad and decided mine is: leadership is about being the person that people need you to be, at the time that they need you to be it.
Why should we seek to lead?
How should strong leaders respond to challenges?
A
The most straight-forward and probably best answer to this question is: because you want to make things better. But there will be many reasons why you want to lead. Motivation is the driving force behind all our behaviour so it’s important to understand exactly what it is that makes you to want to lead. If you understand the ‘what’ and understand the ‘why’ things will be a lot clearer.
Are great leaders born or bred?
I think the answer is both. Yes, some people are born with an innate skill or talent that allows them to lead people through the trickiest of situations. For the rest it is a skill – like any other – that can be developed through study, observation, training and most importantly practise. The more you lead, especially through challenging times, the more likely you are to get better at it.
Often, we don’t get to pick the situation when our leadership is tested; the situation picks us. When it is easy and things are going well, we often don’t realise that we are leading. It’s when times are hard, the team is under pressure or people are afraid that the real leader steps to the fore. It’s worth reflecting during the quieter times on the importance of leadership and how you want to be as a leader.
What about those of us who don’t consider ourselves born leaders?
If you can’t lead, or would rather not, then the best thing you can do is follow. Great leaders are also great followers. It’s all about the context; it’s all about the situation and often it’s all about confidence. The confident leader understands their own strengths and weaknesses and will use this knowledge to decide if they are best placed to lead right now; or that there is someone better placed to lead the team to success. The confident leader will make the decision to lead or to step aside and ‘get behind’.
Russell Lewis MC is a former British Army Officer and now a training consultant. He is a specialist Director on the NACFB Board and specialises in leadership training and strategy development.
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Special Feature
Valuing our valuers Automated underwriting decisions are compromising the integrity of risk
Brian West Director Central Bridging
P
rivate investors and family offices, hedge funds, challenger banks and even the average citizen in the street, through Peer-to-peer platforms, have all fuelled the rapid growth of the short-term lending market in recent years. A glut of liquidity and increased competition has seen rates driven down to levels that were unthinkable only a couple of years ago and loan to value (LTV) limits increased, despite the backdrop of a subdued and, in places, declining property market. Now another trend is emerging that brings back memories of 2006/07, that of streamlined underwriting. Welcomed by brokers but less so by funders, we are now starting to see the first mainstream lenders eschewing the need for a valuation, particularly on selected lower loan to value cases. Prior to the credit crunch and recession, many lenders placed an increased reliance upon automated valuation models (AVMs). This trend started at the lower end of the risk curve, typically on low LTV re-mortgages and further advances and undoubtedly helped ease delays caused by a shortage of valuers. In specifically selected cases where there was enough comparative data to yield robust results AVMs worked well but as is typically the case, reliance upon and the use of this new technology quickly exceeded its limitations. Ultimately, in 2008 and 2009, many funders paid a heavy price because of the excessive use of AVMs in the preceding years. The effects were particularly keenly felt in areas such as Northern Ireland where massive boom quickly turned to painful bust. A decade later, technology has raced ahead, and the valuation process is set to become ever more automated. Blockchain will store the full details on increasing numbers of new builds, drones will replace the drive by with the fly by, giving external imagery in three dimensions, whilst machine learning and Artificial Intelligence (AI) will provide ever more accurate local data analysis. Valuers today can call upon continually improving technology but in an era of increasing regulatory focus on the conduct of all lending institutions, prudence would suggest that several basic conditions should be satisfied on all loans. As a short-term lender of nearly ten years standing, vast operational experience tells us that carrying out a detailed and comprehensive valuation report should always underpin any lending transaction, whatever the LTV, ensuring maximum protection is afforded to a lender and their funders, whether private or institutional. Put simply, a RICS (Royal Institution for Chartered Surveyors) survey backed by PI (Professional Indemnity) cover can highlight any number of potential anomalies with a property, whilst the
surveyor’s commentary on their visit can also give an invaluable insight into the potential borrowers, an insight which no desktop appraisal can ever provide. Surveying is a complex process requiring multiple calculations, the review of many documents, including planning applications, land registry information and much, much more besides. As a prudent lender, we rely first and foremost on our valuers providing us with the two key aspects of a valuation, namely the value of the property we are loaning against and confirmation that the structure is strong and durable. In truth, only an internal inspection can highlight issues such as dampness, wiring defects, dry rot and the structural damage that can be wrought by an overzealous, under qualified DIY fan. Similarly, even outside the property, certain nuances might only be picked up by the trained eye such as Japanese knotweed or indeed the trained ear such as noise disturbance from a nearby rail line or large infrastructure development. Where appropriate the valuer can then recommend that a more detailed report is obtained. Technology may be advancing rapidly but can it ever replace this human insight? No desktop assessment can ever alert you to the issues detailed above let alone give you an insight into the mind of a potential borrower. From a lender’s perspective the pressures of a competitive market to innovate should never compromise the integrity of risk, underwriting processes and ultimately investor security. Meanwhile from a valuer’s perspective we must hope that, with Lloyds of London retrenching from this area of the market, the spiralling cost of PI Insurance doesn’t preclude them from continuing to offer their unique and comprehensive services. With PI often now a surveyor’s biggest expense after payroll, reform of the insurance market, the RICS safety net and if necessary, some form of levy on completed deals to help reduce PI premiums, are all ways of safeguarding our valuation firms and the unique and comprehensive surveyor-led services they offer. At Central we will continue to instruct full internal inspections as a cornerstone of our process. We will continue to ‘value our valuers’ and in doing so play a small role in helping to secure their future.
“
Ultimately, in 2008 and 2009, many funders paid a heavy price because of the excessive use of AVMs in the preceding years
NACFB | 25
Special Feature
We are not an island The world wants UK goods and services Norman Chambers Managing Director NACFB
T
hroughout 2019, the NACFB has received dozens of articles from lenders, brokers and other industry voices seeking to share an opinion on Brexit. Whilst the features read well and their point is often well made, the team knows all too well that by the time they go to print they are likely to be out of date and redundant, such is the blistering pace of current political development. It is with that caveat that we wish to explore a matter that remains central to the Brexit debate, one that is now more pertinent than it has been for over 70 years: exporting. For whatever outlook the future brings, a close trading relationship with our neighbours remains vital for UK SMEs.
Britain as a global power British businesses are exporting more goods than ever before. Long-established trade routes have helped to create more jobs, attract more investment and ultimately grow our economy. UK exports reached a record high in 2018 and have continued to rise steadily since. In the 12 months to May 2019, exports totalled £647 billion – tens of billions more than last year – but we still lag behind most of our G7 counterparts (see Fig. 1). Part of the UK’s economic success comes from both large and small businesses in Britain selling their goods and services abroad. According to the International Trade Centre, approximately 55% of
Passport to prosperity Fig. 1 – Exports of goods and services as a % of GDP for G7 nations 50%
Despite the uncertainty of the UK’s future trading relationship with the EU, the proportion of SMEs who export reached the highest ever level last year, rising to nearly 10% according to the latest ONS figures, although further inspection reveals a greater disparity across business size and functionality (see Fig. 2). Such a rise is important because the government is pinning its hopes on SMEs helping them to meet ambitious targets in raising the proportion of GDP earned through exporting from 30% to 35%.
47%
40% 31%
30%
31%
31%
30%
20%
16% 12%
10%
0%
Germany
Italy
Canada
France
UK
Japan
USA
Source: United Nations Conference on Trade and Development – World Investment Report 2018
UK exports in 2018 were delivered to fellow European trade partners, that percentage compares with 46.6% going to European Union members. Another 24.1% were sold to Asian importers, whilst 15.3% was shipped to North America. Smaller percentages went to Africa (2.3%), Oceania (1.5%) – led by Australia and New Zealand – then Latin America (1.3%) excluding Mexico but including the Caribbean. Given the UK’s population of just over 65 million people, our total 2018 exports translate to roughly £6,000 for every resident. The figures are unsurprising and reiterate the importance of maintaining a mutually beneficial relationship with our largest trading partners, our European neighbours.
This central strategy will, in part, rely on the Department of International Trade (DIT) guiding SMEs through the maze of decisions they must make; such as which countries to target, whether to go direct or through a distributor and what tax, tariffs, insurance, certification and paperwork apply. There is though ample room for brokers to form an integral part of this bigger picture, guiding strategic routes and clearing pathways to finance. The demand for exporting is out there and we all know the UK is home to cutting-edge innovators, we know it is a place that nurtures exceptional talent and creates world-class products and services. This is your and your clients’ opportunity to sell to the world.
“
For whatever outlook the future brings, a close trading relationship with our neighbours remains vital for UK SMEs
NACFB | 27
Furthermore, an exporter can concurrently foster and service other relationships in global commerce, making it far easier to successfully scale a business internationally.
Fig. 2 – UK exporters by company size Business Size
Count of Business
Number of Exporters
% Exporters from Business Population
Micro (1-9 employees)
2,106,800
151,400
7.3%
208,500
39,800
20.2%
Medium (50-249 employees)
35,500
12,300
35.3%
Large (250 or more employees)
8,300
3,300
40.4%
Total
2,359,100
206,800
8.8%
Small (10-49 employees)
Source: GOV – UK Export Strategy 2018
Providing safe passage UK SMEs that focus on exporting goods abroad often have a difficult time dealing with their importer counterparties, simply because it is still relatively difficult to establish trust. Most overseas importers want to pay for goods when they arrive, so that their own cash flows remain strong and enabling them to grant more leeway with their own buyers. Meanwhile, an SME exporter based in the UK has to onboard substantial risk in order to blindly send out shipments of goods without receiving payment. This is a standoff that can deter many potential exporters from confidently exploring the option. There is though, a viable solution. Export finance options seek to bridge the gap between the receipt of goods and that of payment for exporters. A broker can match a business borrower with a lender who is willing to act as the debt collector who can pay the exporter immediately for their goods and then retrieve the money from the importer’s bank. The importer’s bank will require proof that the goods have been sent, such as a bill of lading that indicates the shipment is on the way. For exporters, this extra breathing room can make the difference between a business deal being possible or not. Instead of remaining strapped for cash while the importer offloads the goods and repays on their own terms, an exporter can continue supplying or manufacturing goods without worry over their short-term solvency. 28 | NACFB
Although the nuances are myriad, a typical export finance facility comes in the form of a cash advance. Brokers can help prepare their SME clients for the next step by ensuring they have the necessary documentation in place; generally, this includes: • Balance sheet, assets and liabilities, alongside key company financial details • A forecast of revenues and profits, alongside credit reports • Evidence of existing international trade relationships • All information about the business owner, CEO and beneficial owners Most lenders will consider trade and export finance options on a case-by-case basis, owing to the varying needs of borrowers, but the above information is commonly requested, and brokers can add additional value in helping their clients fully prepare for such an approach.
Selling ‘Brand Britain’ The government confidently predict that 90% of global economic growth in the next 10 to 15 years is expected to be generated outside the EU. Whilst EU member states remain our nearest and largest trading partners, there is a near limitless horizon of opportunity for UK businesses. The role of the lending community in helping to meet our ambitious GDP targets is two-fold. Firstly, both brokers and lenders have a valuable opportunity to share their knowledge of processes and products that open up the borders to UK goods and services. These mechanisms can seek to build bridges between historic trading partners, even whilst the water flowing beneath them remains choppy. The lending community can also play an equally vital role in increasing SME confidence. Instilling business owners with belief in demand beyond our sceptred isle, of the quality of our products and of the safe journey they will take. The growth of the digital economy and trade in services is making the world smaller than ever. UK businesses are superbly placed to take advantage of these trends we have highlighted, and with the help of trusted broker advisers, a nation built on the successes of its commercial links across the world can remain at the heart of global enterprise.
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Special Feature
Resilience, risk and reward The past, present and future of asset finance
Wes Harfield Head of Asset Finance Investec
A
t the end of 2018, we were optimistic about growth prospects, and our broker community firmly echoed this confidence.
When asked about sentiment and expectations for the year ahead, during Investec’s 2018 broker survey, 87% of brokers expected their business to grow over the course of 2019. Further, one in four expected business volumes to increase by more than 15% with an additional 40% expecting volumes to increase by 5-15%. Despite this optimism, brokers also raised concerns about fierce levels of competition in the market as new players entered the space with 57% seeing this as the most significant risk to business growth. So far in 2019, these broker predictions have played out on both fronts. Of course, when looking back at the year so far, we can’t ignore the elephant in the room – Brexit. Undoubtedly, Brexit has caused uncertainty in the market, but this has not slowed business to date. The asset finance industry remains resilient, with growth of 11% in Q1 and our business is reflecting this. We have grown our business 3o | NACFB
through the long-standing relationships we hold with the broker community, particularly in the hard asset space. This growth is partly due to new access to a broader range of businesses, sectors and assets that in recent times were not attractive to funders. As the markets become more competitive and funders fight for wallet share, several funders have widened their appetite for risk. Consequently, challenging and alternative credit options are now available in the mainstream market. The big question is whether these commercial decisions are the right ones and time will tell as we move through the credit cycle and continue to experience economic uncertainty.
“
As the markets become more competitive and funders fight for wallet share, several funders have widened their appetite for risk
Furthermore, competition has been fierce over the last six to ten months, and as a result, we have seen several businesses exit the market, and a few challenger banks have become less active than in previous years. Within this consolidating market, brokers have been telling me for a while that they have been originating unsecured loans for their clients because it has been easy for them to do so via the Peer-topeer (P2P) market. It is evident that liquidity has been so easy to access via this market that there hasn’t been a need for invoice discounting or other forms of working capital funding. However, we’ve seen this trend changing because of well-publicised issues in this market causing providers to rein in their appetite for risk since investments are taking longer to fund, therefore making it harder to access liquidity. I predict that the P2P market is likely to continue to slow as we move towards 2020, which means customers and brokers will revert to more traditional forms of asset finance including hire purchase and leasing as well as working capital solutions such as invoice financing. Recently, we launched Investec Capital Solutions, which offers invoice discounting solutions to medium-sized enterprises and corporates who require finance above £100,000. As liquidity becomes harder to access, we envisage a rise in demand for this business offering, especially invoice discounting with the strongest demand expected in manufacturing, distribution and recruitment. We are open for business and remain committed to this market and our trusted broker community. We will continue to lend and help our clients grow in a sustainable way. We are yet to see how the market, in a potentially post-Brexit Britain will play out into 2020. We do envisage a slowdown in the market post our withdrawal from the EU, but we also expect the
“
We do envisage a slowdown in the market post our withdrawal from the EU, but we also expect the UK economy to ultimately bounce back, providing of course the UK leaves the EU with a deal
UK economy to ultimately bounce back, providing of course the UK leaves the EU with a deal. Overall, 2019 has been a good year for Investec and the asset finance market, as predicted by the results of our broker survey. Despite the uncertainty and ongoing changes, we think that this is likely to continue overall through to 2020. Looking forward, from a business perspective, we have supported brokers and businesses throughout the credit cycle, providing sustainable financing solutions since 2006, and will continue to follow this tried and tested approach. Demand for credit remains strong, even though clients are looking to access credit in a different way, and we remain confident that we can continue to lend to our clients despite the unpredictable market and political uncertainty. NACFB | 31
Special Feature
Portable credit files – enabling SME agility A bold proposal from the Bank of England to UK SMEs Niels Turfboer Managing Director UK & Benelux Spotcap
D
o you sometimes struggle when looking for swift and appropriate funding for your clients? Do you wish you could bypass the tedious task of collecting relevant documents for a loan application? According to recent statistics from UK Finance, UK lenders approved over 290,000 loans and overdrafts to SMEs last year, worth £28 billion in total. Needless to say, commercial finance brokers played a crucial role in helping facilitate a sizeable number of these deals. That said, according to recent figures from the Bank of England, there is still a £22 billion funding gap in the SME loan market, with many businesses struggling to obtain capital to finance growth opportunities. There is clearly potential for lenders as well as brokers to fill this gap. But how? The Bank of England recently launched a bold proposal – an open data platform that would improve access to more diverse and competitive financing options for SMEs. Businesses looking for funding could pull their data, from both public and private sources, into a ‘portable credit file’ and use it to shop around for credit and working capital. In short, the platform could: • Enable SMEs to gather data from a variety of sources in order to build up a richer credit file, including information from HMRC, banks, Companies House etc. • Potentially allow new data sources to be used in the credit scoring process, such as payment behaviour, geographic and online footprint or online product reviews. What could this mean for commercial finance brokers? Firstly, it 32 | NACFB
would provide you with better documentation. Imagine accessing your clients’ VAT returns, bank statements and Companies House information all in one go. Sounds good, doesn’t it? Secondly, sourcing the required documents from one place, in one go, will save you time. Less back and forth with clients means you could have more time to build better relationships with them and generate new business. However, whilst the portable credit file sounds promising, a number of concerns spring to mind; how can different organisations like Companies House, HMRC and the high street banks be encouraged to take part and share all the relevant information in a secure way? Who will develop the technology and feed in all the relevant data? How will relevant business information be kept secure? The list continues. Following the publication of the Bank of England’s proposal, we here at Spotcap recently met with relevant representatives to discuss ways of how we can get involved and support this initiative. I would encourage the commercial finance brokers who are interested to share their views to do the same. The suggested platform is still at an early stage. But should this project succeed, it has the potential to revolutionise the way we lend to businesses and change the commercial finance landscape for the better. Lenders and brokers should keep an eye on the developments – we certainly will.
“
The Bank of England recently launched a bold proposal – an open data platform that would improve access to more diverse and competitive financing options for SMEs
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Special Feature
Future value will take different forms The canons of lending are evolving – we want brokers to adapt with us
Paul Jordan Underwriting Lead Atom Bank
A
t Atom, all our business comes from the intermediaries – brokers like you who trust us to provide a service, and ultimately finance, to their clients.
When assessing an application, the old ‘canons of lending’ still have relevance. Assessing a lending application by considering categories related to the business and the key people behind it, is a good discipline, as long as you then take a balanced view. The purpose is critical, it has to help the business as well as be suitable for the lender. Nowadays capacity would probably best be split into the borrower type and security package and serviceability would be a separate category. This is because repayment ability is more important than ever. Understand the lenders you work with in terms of their attitude towards key areas including what type and level of security they require and what type of financial information is acceptable. For example, are they bothered about the condition of the property or just the value? How much emphasis is placed on cashflow projections or forecasts? Character is possibly an outdated phrase given the need to be open and transparent. I think looking at experience, transferable skills or career history are more palatable phrases, and gets to what we are really trying to understand: has the borrower got the right skillset to operate the business? Ideally, provide the client’s CV to the lender, it can save you lots of typing and can also prevent questions coming back. The deal terms are key for whether an agreement to lend will be accepted, and how quickly it can proceed. We endeavour to only ever ask for what we need. We only put conditions on offers where necessary, and we try to get from application to offer to completion, as quickly as possible. How information is gathered is the biggest change. Lenders are able to gather data electronically from a range of sources, some are public, such as company information at Companies House, some are with the client’s consent such as credit bureau data, and some are through open banking, which is a major change in the market. The increasing importance and availability of data via API will revolutionise the accuracy of data and speed of decision making. The precision of lending this enables is an exciting opportunity – we just need to work hard to keep up. Further automation and innovation in the sector are inevitable. If you don’t want to be involved in that then arguably, you’re in the wrong place.
opportunities out there. There is a willingness from clients to change lenders and to look for new relationships that provide flexibility, and not rely on the current decision or appetite of a major high street bank. There are some unusual structures and requests which provide more of a challenge to underwrite, but there is a growing awareness of the number of lenders who could help clients. The key to success for us is communication. We rely on the relationship brokers have with their clients, the understanding between them and the accuracy of information presented to us. When the trust is transferred to us, we take that responsibility seriously. We will quickly review the proposal; if the answer is no, we appreciate you want to know quickly so aim to deliver that quick, polite ‘no thanks’ response. We aim to move to completion as fast as possible, obtaining whatever else we need as efficiently as possible and keeping our brokers updated along the way. We are a digital bank but we’re customer first and recognise that personal touch is important. We always make telephone contact in the first instance and follow up by email where necessary. It then comes down to open, honest and sensible dialogue. If something is not clear, or the answer is not known, I’d much rather be told that and we can come up with a plan of action together, rather than a best ‘guestimate’ which could lead to incorrect outcomes and possibly more work for all of us later. This then should lead to a transparent and sensible decision which is in line with both our credit policy and what we say we will deliver.
“
The increasing importance and availability of data via API will revolutionise the accuracy of data and speed of decision making. The precision of lending this enables is an exciting opportunity – we just need to work hard to keep up
What we are seeing from brokers now is that there are good business NACFB | 35
Special Feature
After the goldrush Small developers are relying on the government to get serious about releasing land Steve Larkin Director of Development Finance LendInvest
W
hen you speak to any small developer, you’ll hear the same handful of issues are holding them back from delivering even more new homes.
Chief among them remains access to land. Small developers continue to operate at a significant disadvantage when it comes to getting hold of land on which to produce homes compared to their larger rivals. It’s something that the government has acknowledged and looked to address through its release of public sector land for housing development. However, it appears that there is plenty of work to do on that front.
Behind schedule A new study from the National Audit Office (NAO) looks at how the government is progressing against its targets for releasing that public sector land for housing, and it makes for concerning reading. The government has set itself a target of releasing enough public sector land in order to build 160,000 homes by 2020, yet according to the Ministry for Housing, Communities and Local Government (MHCLG), departments are likely to have released enough land for just 65,000 homes by that point. That’s just 41% of the promised land, with the department suggesting it may take until 2025 to hit that target. Looking back to the public sector land released since the initial programme between 2011 and 2015, the NAO found that against the original target of enough land for 100,000 homes, just 40,500 have been brought to market. 36 | NACFB
What’s holding them back? The MHCLG has pinpointed a host of challenges which are impeding them from releasing more public sector land quickly. For example, in some cases public bodies are still actually using the land and so it can’t be released until they are relocated. Sales of large, more complex sites have been delayed too as a result of issues with planning, while some sites need to be decontaminated before they can be released for housebuilding purposes. However, the NAO pointedly notes that the MHCLG did not provide any data on how many sites have fallen into each of these categories.
Is it all about the money? While the government is significantly behind target when it comes to the amounts of land being released, there are no such issues on the money it’s looking to raise from these sales. The government wanted to bring in £5 billion by releasing this land when it introduced its target, and it claims to be on course to do just that.
“
Two transactions have raised more than £1.8 billion already, with
But talking the talk isn’t enough. That the government is so far behind on its target for land release is disappointing
£2.48 billion generated up to March last year. Of the 1,500 sites sold up to that point, more than one in ten (12%) were sold for £1 or less.
Talking a good game isn’t enough
far behind on its target for land release is disappointing. Small developers are crying out for opportunities to pick up land that is ordinarily out of their reach, and to get moving on producing the homes that this nation desperately needs.
The government has generated support among the property industry precisely because it has acknowledged the systemic issues holding back increasing the rate at which we build homes and identifying ways to address those issues.
This isn’t an issue that can be kicked down the road, to be addressed at a later date. This land could make a huge difference to the nation’s small developers and would-be homeowners alike, and it is imperative that the government grasps this opportunity.
But talking the talk isn’t enough. That the government is so
It’s time to get serious.
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NACFB | 37
Industry Insight
The fundamental shifts in UK property Disruption in the UK property market continues to provide opportunities for brokers and lenders Nick Hume Director – Valuation Savills
T
here are disruptive forces at work across the property sectors with elements of the traditional market moving towards operational models. Within the office sector, lease lengths are shortening, and the serviced office market continues to grow, thereby creating issues for traditional valuation assessment models. In the shopping centre market, internet retailing has played a part in creating a combination of occupier instability, rental reductions and the growth of turnover rents. It has therefore become increasingly challenging to predict the path of the net operating income, a direct reason why the asset class as a whole is less favourable with investors and has become less attractive to the property finance market. Within the residential sector, a shift is under way from ownership to rental models. Owners across the property spectrum are therefore having to adapt to the increasing prevalence of the operational asset classes and, in turn, lenders are following those owners, albeit with variable enthusiasm. The rise of the serviced office sector has been in response to demographic and generational shifts, with a more recent focus on flexibility and wellness. Space is becoming a service and for the occupier it is ease and flexibility that are the key drivers of 38 | NACFB
demand. This sector is changing the dynamic of the office market, most notably in Central London where it currently encompasses approximately 7.5% of the total stock. Notwithstanding the growth of this sector, many property lenders remain cautious and cite the lack of financial transparency from the operational entity. Some lenders will provide debt finance secured against an asset where say 20% to 30% of the rental income stream is derived from the service office provider. There is understandably far more reticence towards lending against an office building that has a lease over the whole. Ironically, however, a building will tend to perform better as a serviced office if occupied as a whole, partly due to the ability to use the less valuable space for communal uses. Where debt finance is provided against an asset which is fully let to a serviced office provider, concern with the lack of operational transparency
“
Investors are now placing less emphasis on shopping centre yields; it is more about the true cashflow and geared returns
entails that the lender will pay particular attention to the underlying vacant value. Over time, there should be a greater level of transparency in terms of the operators’ performance within each building, thereby creating an improved level of collaboration and confidence between the operator and the owner, and thus assisting the lender in making informed decisions. In addition, the serviced office sector is increasingly aware of the importance of the property finance market, both from occupational and investor demand perspectives. It is therefore likely that operators will increasingly be open about their trading performance. In the retail arena, the oversupply of shopping centre space has caused rental and value reductions. Going forward, all parties will need a better understanding of the performance of retail assets to gain confidence in the rental income profile. Within this, turnover rents will become more common as retailers increasingly seek to relate their liabilities to occupational performance. Investors are now placing less emphasis on shopping centre yields; it is more about the true cashflow and geared returns. Schemes that have been repurposed and are transparent in trading terms are undoubtedly more sought after amongst investors. There is no shortage of equity for the right propositions. The residential market is also being disrupted. The relatively high value of property and the consequential increased desire for renting and other forms of occupation such as co-living, have encouraged the growth of the build-to-rent sector. This is still a relatively immature market and there remain concerns amongst some lenders as to the forecast stabilised rents and running costs. Given the
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Lenders will also increasingly need to understand the equity story and the options available if challenges arise
importance of the net income stream, some lenders are reticent to enter this market until these parameters become more established. Build-to-rent is all about the scale of operation and having an understanding of the stabilised rents and costs is of fundamental importance. Overall, as the operational asset market evolves and becomes more established, and the operators achieve a proven track record, it is likely that the operational models will become more acceptable to the lending fraternity, just as student accommodation has done. To reflect the changing dynamics of the property market, lenders and valuers will increasingly focus on the cashflow analysis of an asset, the quality and quantum of the occupier base, the overall running costs and the vacancy rate. Lenders will also increasingly need to understand the equity story and the options available if challenges arise. A greater focus will therefore be on the quality of the net income stream and debt yield. For all, it’s arguably a case of evolve or get left behind. NACFB | 39
Industry Insight
Striking the right chord with business borrowers You never get a second chance to make a first impression
Paul Mackman Vice Chair for the Eastern Region Chartered Institute of Marketing
and Starling over larger institutions as SMEs in the sector look to break away from the traditional homogenous perception of the financial industry and stand out. It’s vital for brands to define who they are and what they stand for. Good branding elevates your business and gives clients a reason to choose you over your peers.
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What do brokers need to do to enhance their brand?
randing in the financial sector has never been more important. In a time where there is increased scrutiny from the public and legislators – having a brand people can trust is critical. Warren Buffett, famously once said: “It takes twenty years to build a reputation and five minutes to ruin it.” According to YouGov’s International Omnibus Study in 2017, only 55% of Britons trust banks, and only 36% think they work in their customers’ interest. Across Europe, the picture is even bleaker.
Once you’ve developed your brand, or maybe you work for a brokerage that already has a clear brand, you need to maintain and enhance it to fend off the competition. Ask yourself if you have understanding and engagement from all levels of your organisation, from board level to the brokers. Your entire organisation should know what the brand stands for, what differentiates it, and the benefits it provides to customers as well as the business.
Making your brand stand out in a crowded market is vital for communicating your unique personality, reputation and value to potential customers. So, why is branding so important to SME brokers?
If you feel that’s not the case, consider the following ten questions and score yourself out of ten on each. Then consider using the checklist to see how you can improve.
Branding is key in gaining recognition with your target audience. Every aspect, from your website, to photography, to corporate design, to email promotions are defined by your brand. Every touch point is an opportunity to increase brand awareness and improve client loyalty.
• Marketing research – Do you conduct regular and insightful customer and market research?
Branding creates and builds trust. Having a strong and clear-cut brand that people believe in, builds financial value, develops future business growth and shareholder value. People are more likely to engage with a brand that is well presented and is seen as credible and honest. Keeping the momentum going and staying ahead of the game should be on every SME broker’s mind. Brands that have a point of differentiation, increase the chance of gaining a foothold and attracting talent. The rapid evolution of technology has also led to a seismic shift in customers’ expectations of how brands should act, react and interact. In the past, changing banks was seen as a seismic event, now customers are increasingly trusting fresher brands like Monzo 40 | NACFB
• Market selection – Do you have a clear target market(s) focus and really understand their changing needs? • Brand positioning – Do you have a differentiated brand proposition, linked to your mission and values and communicated through brand guidelines? • Visual identity – Are all environments, both customer and employee, on brand? • Products and services – Are these innovative, differentiated from and better than the competition? • Brand loyalty – Do you have a relationship management plan for customers and other important stakeholders?
• Employee engagement – Are they satisfied and is your brand proposition understood and practised in their everyday behaviour? • Promotion and communication – Are all communications (online and offline, internal and external) on brand? • Measuring success – Are your key marketing objectives for customer awareness, preference, purchase and lifetime value regularly measured and acted upon? • Staff buy-in – What percentage of your staff do you think understand your brand?
Keeping one step ahead Once you have successfully enhanced your brand the next step is to ensure you remain in the forefront of your customers’ and prospects’ minds. Now is the time to ensure that action plans are in place to overcome the biggest barriers to effective brand engagement. Successful marketing requires that you understand customers’ needs and preferences. It requires that you know how to outperform your competition, requiring you to play to your strengths and manage your risks. Managing a complex set of stakeholder perceptions and relationships as well as the key one – customers with choice.
NACFB | 41
Industry Insight
Boots on the ground In an age of data-driven credit models we can’t abandon the face-to-face approach to finance John Mould Chief Executive Officer ThinCats
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ften when people think of fintech lenders, a particular image comes to mind – a young graduate with a head for numbers sitting in a swanky London high-rise with limited knowledge of your business aims besides your credit rating. We know there is much more to lending than plugging algorithms and software into a computer. Of course, data is a fundamental part, but it is still just a part of a larger whole. It’s only through having experienced credit and finance people ̒on the ground’, close to potential borrowers and their advisers that lenders can offer truly bespoke service. Some might say that this is reminiscent of local bank managers, and they’re right – except in our case, at ThinCats, the combination of a regional directors’ credit experience and their access to pioneering data offers a vastly different experience for borrowers. In fact, many of our regional finance experts have joined us from banks in order to be immersed in their local business communities. While traditional lenders tend to stick to offering asset-backed loans, most of our loans are cashflow backed. Therefore, we need to see exactly how a business generates its profit and be aware of potential risks to future profitability. Having a good understanding 42 | NACFB
of how a business will hit its forecast EBITDA targets and manage its cash flow is critical and is where the local and sector experience of a regional credit team comes to the fore. This depth of understanding just isn’t possible in many traditional lending models where centralised credit teams may have little or no direct contact with prospective borrowers. By having our business development and regional credit teams working closely together they can discuss the merits of potential deals and provide a quick initial assessment. If we think we can fund a deal, the regional business development director and regional head of credit will meet the prospective borrower as soon as possible to find out more about their plans for the business and the purpose of the required funding.
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We know there is much more to lending than plugging algorithms and software into a computer. Of course, data is a fundamental part, but it is still just a part of a larger whole
The other great advantage of meeting and discussing funding needs directly with prospective borrowers and their advisers is that we can often suggest alternative funding structures that may be better suited to a business’s longer-term plans.
By investing time to properly understand prospective borrowers through regional teams and by enhancing this with insight from our data-driven credit models, we identify many businesses that we are keen to fund that may be overlooked by traditional lenders.
A bank of knowledge not simply a bank of money Our support for your broker business goes beyond finance. We can connect you with the right people, with the right knowledge, to boost your clients’ businesses and help them grow. Search: NatWest Brokers
NACFB | 43
Broker Voice
Stand and deliver How you present to stakeholders is just as important as what you present to them David Byford Director Byford Commercial Finance
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hat is it about being asked to stand up in front of a group of people and talk that makes it so terrifying for most of us? Why do some seem to thrive in this environment and deliver inspirational, never to be forgotten pieces whilst others seem incapable of even stringing a few words together in front of their audience? Well of course it is true that some are born to present, to be up on stage and enjoy being the focus of everyone’s attention. But even those lucky enough to be naturals do suffer from some nerves, they are just good at disguising them. They need a structure to be successful in getting their message across. If you take a moment to think about the best presentation you’ve ever seen, it’s almost certain that most of the following ingredients were present:
Preparation If you have never been to the place you’re presenting before, it is good to visit the venue before your presentation if you possibly can. This will help you to visualise the actual delivery and pinpoint any potential issues. Get there in plenty of time on the day and try to have a run through before your audience arrives.
Structure Every good presentation has a clear beginning, middle and end. The introduction needs to grab your audience’s attention so try to be creative with this, a good start also helps to calm your nerves. The middle is the meat of the presentation, where you share the detailed messages, and the end should be a summary of what you have covered. 44 | NACFB
Visual aids Visual aids have a number of benefits in a presentation. We know that seeing and hearing rather than just hearing improves the audience recollection of your presentation. I have watched with interest how some presenters use their visual aids as a kind of shield, standing behind the flip chart or projector screen to prevent any invisible missiles thrown by the audience from hitting them.
Ask questions Most presenters are aware that just talking to their audience for more than ten minutes at a time may not be enjoyable for anyone. To truly engage with their audience, there must be some interaction. For the experienced presenter, these are all issues easily dealt with. To the inexperienced presenter, this is often a step too far as the fear of running out of time or going off subject is too much to bear. If you can achieve most of these ingredients in your presentation, your nerves should drift away as you get carried along on a wave of acceptance and gratitude from your audience and perhaps even a feeling of elation on a job well done.
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I have watched with interest how some presenters use their visual aids as a kind of shield, standing behind the flip chart or projector screen to prevent any invisible missiles thrown by the audience from hitting them
Fast-track finance Speed’s often of the essence when secured finance is needed. At Accredo we work fast to meet your clients’ needs, underwriting 96% of new business proposals this year in under 3 hours. And with average payout times of under 3 weeks and further advances in as little as 3 days, we really are driven by your clients’ schedules. We offer loans from £25,000 to £1,000,000, often lending when others won’t, and terms from 3 months to 10 years. Quick decisions, fast finance – Accredo Send your proposals to props@accredoltd.co.uk or call us on 01444 255915 for more details.
Opinion
Welcome to the world of broking Our top tips for new commercial finance brokers Andy Reid Director, Intermediary and Network Richard Payne Director of Development Oblix Capital
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ongratulations – you’ve built up a lot of good experience working for one or more brokers up to this point, but you’re now a broker in your own right.
at the beginning of the process, rather than in the middle or near the end of it. 5. Tell the lender the anticipated date the client requires funds – even if that is quicker than might seem reasonable. A good lender can work with you to achieve tight deadlines.
Development
A good broker understands the benefit of building strong relationships with the best lenders – and those lenders also understand the benefit of building strong broker relationships. Ultimately, both broker and lender are here to serve the borrower, and it’s in everyone’s interest to work together to achieve the best outcome through a combination of price, service, reliability, speed and expertise. A happy borrower is a possible repeat customer.
1. Start with a description of the site security, for example, ‘a small development of two and three-bedroom houses (eight in total) situated in a cul-de-sac of Pleasant Road, Midtown’.
Between us we have more years’ bridging and development experience than we care to admit, but we put our heads together to compile the following top tips for new brokers.
3. The current planning status is important – along with the full summary of the development project provide details of what planning has been approved, and the date of approval.
Bridging
4. Lenders need a clear picture of the contractor/client/ developer’s experience, so provide a summary of their CV, and a brochure/document showing their previous projects.
1. When you make a bridging enquiry, provide details of the planned exit strategy and when the term expires as well – this will enable the lender to make a better assessment of the application. For example, if the exit strategy is a move to Development finance, provide an estimate of the development costs plus contingency as well. 2. The type of property is essential to assessing the application – make sure it’s accurately included. 3. If you’ve already tried to place a case with other lenders but they haven’t progressed the enquiry, it’s always useful to know which lenders have already looked at the case – and the reasons they wouldn’t progress it. 4. Tell the lender all the good things about the enquiry... and the bad things. It’s better to identify and try to overcome any issues 46 | NACFB
2. Provide a complete breakdown of the development transaction including contingency plans, contractors’ details and JCT arrangements.
5. Provide details of the exit strategy – for example, sale, retain on a BTL basis, refinance to term loan, etc.
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Ultimately, both broker and lender are here to serve the borrower, and it’s in everyone’s interest to work together to achieve the best outcome through a combination of price, service, reliability, speed and expertise
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Opinion
Future-proofing the asset finance sector The sector remains diverse and awash with talent, only together can we adapt to new challenges
Don Brayshaw Director Black Arrow Group
independent firms funded by investment houses or other private businesses looking for a decent return. Over the past 10 years the asset finance market has grown consistently. Despite the economy cooling and the uncertainty around Brexit, the
I
’ve been in the asset finance industry for more than 30 years and right now we have the most diverse asset finance market I can remember. It’s an intensely competitive market and, arguably, the return on risk ratio is at its lowest point in living memory, largely as a result of the levels of liquidity. According to the British Business Bank’s 2018/19 report, awareness of alternatives to traditional finance has continued to grow. More than half (52%) of small businesses are aware of Peer-to-peer lending, 70% are aware of crowdfunding platforms and 69% aware of venture capital. These figures are up from 47%, 60% and 62% respectively in the previous year. There are several reasons for the market becoming so diverse. Effectively the major banks pretty much pulled out of mainstream asset finance business and the slack has been mostly taken up by 48 | NACFB
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Asset finance has a code of conduct but very light regulation. While a lack of regulation can be a concern, it also allows new, interesting and brave products to enter the market
market continues to grow, albeit, now at a much slower pace. The latest figures from the Finance & Leasing Association (FLA) show that asset finance new business (primarily leasing and hire purchase) for deals of up to £20 million grew by 6% in May, compared with the same month in 2018. Regardless of any slowdown, I think you could probably argue that the figures are impressive given the background of everything that’s going on in the macro economy, where growth is anaemic at best. There is little doubt that has been assisted by a key dynamic of the asset finance industry in that it is less regulated and more diverse than the banking industry. However, whilst lending levels can still be respectable, you also must give more than a sideways glance at the quality of the deals being done. As ever, volume targets – no doubt aggressive – play a significant part as the drama unfolds; particularly in a market significantly under-lent. When running behind targets, there are in reality only two things that might happen. Firstly, you price more aggressively to get more business. Secondly, your appetite for risk grows. You’ll get more business, but the question remains: is good quality business being written and does that return reflect the transaction risk? In general, the answer appears to be yes, although we all lend for five years and beyond and the turbulent economic times ahead could take their toll. It is oft-forgotten that business credit arrears tend to result in write-off because many clients are limited liability companies, so people can effectively walk away from the debt – and that’s really what tends to hurt us as funders. The only way you can get your money back is realising the asset or maybe any security you’ve got, but this is tremendously difficult currently, being almost always slow and protracted. Asset finance has a code of conduct but very light regulation. While a lack of regulation can be a concern, it also allows new, interesting and bold products to enter the market. The broker community has very much benefitted from this as well as the deluge of new entrants into the market during the period up to 2016. A relevant anecdote
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Brokers, keen to keep funder relationships warm, now have the delicate balance to perform of how much business to place with each funder on their panel, which is something I know they wrestle with on a daily basis
relates to a broker we took on in 2009 who at that point we were his fourth funder – he now has in excess of 50 funders. And that’s not an uncommon situation. An interesting flipside to this is that brokers, keen to keep funder relationships warm, now have the delicate balance to perform of how much business to place with each funder on their panel, which is something I know they wrestle with daily. But although we’ve seen a lot of new entrants, we’ve also seen quite a few being forced or choosing to restrict what they do in the marketplace. Funding Circle is the obvious headline in this regard; choosing now to restrict volumes in a search for better covenants and something people often seem oblivious to when discussing fintechs, the P word, profit. Today’s asset finance sector is at its most diverse and competitive in living memory, so what next? It seems unlikely that significant growth will be seen in the next few years, given the economic backdrop, which will mean an inevitable consolidation of well-run lenders and perhaps – mention this in a whisper – the larger scale re-entrance of one or more high street banks as they find the returns offered by well-run finance companies irresistible. NACFB | 49
Opinion
Banks are pulling back from SME lending Will their lending to alternative funders be next? Marc Bajer Chief Executive Officer Hadrian’s Wall Capital
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ith Brexit still unresolved and the uncertainty extended to October 31, banks are continuing to reduce their exposure to SME lending. There are also signs they are now turning cautious on their wholesale financing of alternative lenders – so where next for SME finance? More and more businesses have come to rely on alternative finance providers over the last decade. New entrants such as fintech, funds, and insurance companies, have replaced some of the traditional forms of lending banks used to provide. However, much of the finance these alternative funders provide is ultimately provided by the banks, in the form of large revolving credit facilities. The bad news for small businesses is that the banks’ increased caution now includes the alternative finance providers themselves. Banks are increasingly charging higher rates to provide these funding lines, making them more expensive and reducing an important conduit of finance for businesses. Data from the Bank of England shows the total outstanding bank lending to invoice finance providers, for example, has fallen 18%, from £11.8 billion to £9.7 billion, in just the eight months from September 2018 to May 2019. These cuts in funding of invoice finance – primarily used by small businesses – suggests banks are reducing their exposure to SMEs through invoice finance houses. It is risky for UK SMEs to solely rely for finance on the banks. With Brexit on the horizon, along with the potential for an economic slowdown, a shortage of funding is a concern for UK businesses, 50 | NACFB
bringing to mind the last recession, when the economic downturn was exacerbated by banks cutting credit lines to smaller businesses and putting those businesses at risk. Therefore, it is vital that banks are not the only source of finance for SMEs in the UK, especially given the restrictions placed on their lending by the Basel III regulations. If they continue to pull back, both from lending to SMEs directly and from lending to the alternative finance providers, the consequences could be serious for UK businesses. Apart from the potential for weaker businesses struggling for lack of funding, it could also be harmful if Britain’s growing SMEs were forced to cut back on investment because of a lack of affordable finance. If the UK leaves the EU without a deal, empowering those businesses to invest and grow will be more important than ever and alternative financing will be an important source of that capital. At Hadrian’s Wall Capital, we’re stepping in where the banks are pulling away. We’re increasing the amount of lending we write for alternative finance providers. We’re keen to talk to invoice finance, asset finance, and other alternative finance providers about the block finance we can provide – at fixed rates and in the long-term.
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The bad news for small businesses is that the banks’ increased caution now includes the alternative finance providers themselves
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Securing pole position Help us help you by making our first contact point a quality one
Sky Mapson Deal Origination Maslow Capital
Leverage For some borrowers, the all-in cost of debt might be the most important aspect of any loan offer whilst for others it will be the leverage offered. Some lenders can offer senior and stretch senior facilities, so it is important to indicate early on what the ask is to allow the lender to work with you as efficiently as possible to provide a funding solution that works.
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hen presenting a development project to a lender, the details shared and the manner in which they are presented can be critical in terms of whether the enquiry is given the appropriate level of attention. With that in mind I thought it might be worth sharing what we at Maslow look for in terms of initial information when considering a development loan. Some of these points will often result in a binary outcome (borrower experience/ product type) whilst others are more to ensure that we can put our best foot forward and in a timely manner:
Experience Probably the most important aspect of any deal, is the ability to clearly demonstrate that the borrower and their professional team have the requisite experience to deliver the scheme the lender is being asked to consider. Different lenders will have different bars for what constitutes appropriate experience, with some only considering schemes for first time developers if a team with the appropriate experience is in place whilst others will want to see a track record of similar schemes having been successfully delivered and successfully exited in the past. 52 | NACFB
Location Lenders will have geographies they like and geographies they don’t. They may also have exposure limits they need to be mindful of, so it is important to share address details early on. A relatively simple one but I have had introducers who have been vague on location details in the past.
Product Whilst some lenders will say they like student accommodation schemes they might only want to lend on cluster led developments, similarly lenders might want to fund residential housing schemes as opposed to flatted ones, so it is important to be specific about the product type under construction.
Liquidity Whilst some lenders might have blanket restrictions on what type of units they will lend on, others might take a more pragmatic view in the context of sold comparables or liquidity in the micro location for a unit type. Take houses with a capital value of >£1 million, this type of scheme will typically be more difficult to fund but if a borrower can evidence recent sales in the area that support the GDV assumption then lenders might be more willing to consider that scheme.
Assumptions
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Some borrowers will refuse to give guarantees and some lenders will not consider a scheme without some element of recourse
An appraisal and ideally a cashflow should be provided breaking down a borrower’s cost assumptions and programme. From our perspective it is important to benchmark the assumptions being made in terms of pounds per square foot for build costs, professional fee allowances and contingency. The earlier we have this information, the better.
Contractor
History This is relatively easy to establish if a borrower is acquiring a site but where a site has been acquired historically and taken through a planning process it is important to make it clear to the lender what the original purchase price was and if there is any outstanding debt on the site.
Recourse Some borrowers will refuse to give guarantees and some lenders will not consider a scheme without some element of recourse. This can often be a deal breaker so it is important to be clear on the borrower’s position from the outset to ensure a potential lender can work with it.
Admittedly this information might not always be available at the outset but to the extent it is or even if a tender list is available, it is always helpful to share the details of the potential contractor to allow the lender to make an assessment of their suitability for the project.
Margins A recent trend I have seen when working through enquiries is lower profit margins, particularly if the borrower is acquiring a site that already has planning permission. We don’t have any real hard and fast rules around a minimum profit on cost etc. But it is important to understand that the profit the scheme generates is sensible. This is also important from a residual value perspective, as once a valuation professional appraises the scheme, they will assume market standard levels of profit in arriving at their view of current market value which can in turn impact on funding offers. NACFB | 53
Five Minutes With
ive F Minutes with: Liza Campion Liza Campion Head of Key Accounts Precise Mortgages
Describe your role in ten words or less? Hugely rewarding, challenges you every day, dealing with inspiring people.
What law would you pass if you were Prime Minister for the day?
In your view, what are the key elements to a successful deal?
I’m passionate about environmental issues, so if I could pass any law it would be to ban plastic packaging where there is an environmentally friendly alternative.
Ensuring you understand the facts and always submit your application with case notes that fully explain the situation so the underwriter can make an informed decision.
What is the best live music experience you’ve ever had?
If you were to start your own small business, what would it sell?
That’s a tough one as I’ve seen so many, however seeing Leonard Cohen in concert was amazing. He was a true musical genius and accomplished poet. A real legend.
I’d like to own a fine art photography studio. I’d use it as a platform to promote environmental issues through thoughtprovoking pieces of art.
What advice do you have for the modern commercial finance broker? Specialist lending is becoming the norm and it’s worth knowing that there are lenders like Precise Mortgages who can help provide solutions for customers with complex borrowing needs. 54 | NACFB
Who do you admire most and why? It has to be Warren Buffett. Although he’s a multi-billionaire and a shrewd businessman, he remains humble and unostentatious – he’s a real inspiration.
Where is your favourite place in the world? It has to be Nepal. I was fortunate enough to trek in the Himalayas some years ago as
I wanted to photograph the red panda in the wild, as well as see the rhododendrons in bloom. Knowing you are on the roof of the world where few people have trekked before, surrounded by breathtaking scenery and amazing people, is a really spiritual experience.
If you could have dinner with anyone from history, who would it be and why? I know I should pick someone awe inspiring from history, but I’d choose my birth mother. She sadly passed away from breast cancer when I was just four years old. She lived a fascinating life, was an accomplished opera singer and pharmacist, and to have the opportunity to spend time getting to really know her would be priceless.
If there was an Olympics for everyday activities, what activity would you have a good chance at winning a medal in? Speed of email answering would have to be up there. There’s an absolute deluge of them every day and I have found that my speed typing really is a godsend!
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Nick understands
Nick Warren understands that you are looking to work with an approachable, adaptable and dependable partner who will look for reasons to say 'Yes' to your proposals. That’s why in uncertain times our book stays open. • Responsive decisions at attractive rates • Flexible funding tailored to individual needs • Loans from the everyday to the extraordinary Nick is one of UTB's Business Development Managers - just one of our growing team of Bridging specialists working closely with broker partners across the UK to help them deliver flexible short term loans. T: 020 3862 1002 E: bridging@utbank.co.uk
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