Commercial Broker (NACFB Magazine) January 2022 by NACFB

Issue 96 JANUARY 2022

Broker COMMERCIAL

The award-winning magazine for the National Association of Commercial Finance Brokers

16 THE FUTURE’S BRIGHT

18 A HEALTHY CONVERSATION

Commercial property at the centre of economic recovery

Life through a lens Results from the NACFB broker survey

How the NACFB is improving its Members’ review experience

40 ALL CHANGE PLEASE What is driving the buy-to-let sector in 2022?

42 THE TIP OF THE ICEBERG Your guide to finding £120 million in missed broker fees

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Contents

In this January issue NACFB News

Special Features

4 6 8

22-23 Praetura: Consider the alternative 24-39 NACFB: Life through a lens 40 Recognise Bank: All change please

10 12-14

Note from Norman Chambers Updates from the Association Note from headline sponsor, Allica Bank Industry news round-up Membership news

Industry Insight 42-43

LDS Sales Guarantees: Tip of the iceberg 44 Purbeck Personal Guarantee Insurance: Reasons to be cheerful

Opinion & Commentary 46-47

52 54

Omega Group: Circling the triangle CHL Mortgages: Limiting factors Market Financial Solutions: A levelling up Listicle: New year, new resolve Five minutes with: Stephen Parr, Midlands Relationship Manager, Cambridge & Counties Bank

Further Information KIERAN JONES Editor & Feature Writer

33 Eastcheap | London | EC3M 1DT Kieran.Jones@nacfb.org.uk JENNY BARRETT Communications Consultant

33 Eastcheap | London | EC3M 1DT Jenny.Barrett@nacfb.org.uk LAURA MILLS Graphic Designer

Patron Profile 16-17

33 Eastcheap | London | EC3M 1DT Laura.Mills@nacfb.org.uk

YBS: The future’s bright

Compliance Update

MAGAZINE ADVERTISING T 02071 010359

18-19 NACFB: Healthy conversation

Magazine@nacfb.org.uk

Ask the Expert 20

Qardus: Understanding Islamic finance

MACKMAN Design & Production T 01787 388038

mackman.co.uk

NACFB | 3

Welcome

Norman’s Note

ince the onset of the pandemic, the mental and physical wellbeing of the workforce has been in the spotlight like never before. So, the fact that Christmas Day and Boxing Day fell on a weekend was, I think, good for everyone here at NACFB HQ. The ensuing public holidays meant that the team was able to really rest, recharge and catch up with loved ones. I’m glad to say that we’ve returned to the virtual office with a spring in our step and we’re looking forward to meeting head on any challenges that arise. One of the first tasks on my desk, was to review the results of the annual broker survey which we ran at the end of last year. To my mind, there were several standout findings… In 2021, NACFB Members introduced a whopping £40.9 billion to commercial finance lenders, up 50% on 2020 when the figure was £26.7 billion. The average loan size facilitated by Members in 2021 was £458,582, up 17% on the year before.

Norman Chambers Managing Director | NACFB

Members welcomed a phenomenal 146,885 new clients last year. This is not a question we’ve asked before and with 1,003 Member firms, that’s approximately 146 new clients each. Bear in mind that some brokerages are larger than others so they will naturally acquire many more new clients than brokers who work as sole traders. Nonetheless, it’s a staggering figure and as it’s often easier to extract business from existing clients, it bodes well for the future. Last but by no means least, 41% of Members told us that they diversified their offering in 2021, i.e., they expanded the types of products they source for clients. I take from this that like their SME clients, Members are not afraid of adapting their business models to survive and grow. Only 5% elected to specialise, and the rest stayed the same. It will be interesting to see how this new question is answered in the coming years. The full results of the survey can be found within these pages. I think you’ll agree it makes fascinating reading. Happy New Year to you all.

4 | NACFB

Bridging specialisms for every scenario. As real property experts, we are always standing ready to support your clients when they need to make an urgent purchase, refinance, development-exit or just release equity. All property classes considered to include residential, HMO, commercial and land with planning.

Colin Mottram, Relationship Director: Bridging

Real world lending 0800 470 0430

www.assetzcapital.co.uk/bridging Assetz SME Capital Limited is a company registered in England and Wales with company number 08007287. Assetz SME Capital Ltd is authorised and regulated by the Financial Conduct Authority in respect of its peer-to-peer lending platform only. ’Assetz Capital’ is a trading name of Assetz SME Capital Ltd. Assetz SME Capital is registered with the Office of the Information Commissioner (Reg No: Z3338899) for data protection purposes.

NACFB News

Association updates for January 2022

NACFB News NACFB confirms 2022 Patron sponsors

NACFB enhances Board of Directors

The NACFB has announced that Allica Bank will be the Association’s headline sponsor for 2022 and a further twelve other lender Patrons have been welcomed as support sponsors.

Last month’s AGM, held on 20th December 2021, saw the Association welcome new faces and experience to the NACFB Board of Directors. The virtual election saw Gary Cain (Reach Commercial Finance), Amanda De Courcy (ADC Financial), and Kim McGinley (VIBE Financial Services) become NACFB Directors for the first time. A very warm welcome and huge congratulations to all three.

They are Aldermore, Cambridge & Counties Bank, Funding Circle, Haydock Finance, InterBay Commercial, LendInvest, Lloyds Bank, MFS, Precise Mortgages, Shawbrook Bank, Together, and YBS Commercial Mortgages. Allica takes over from Lloyds Bank, who had been headline sponsor for the last three years. Commenting on the sponsorship opportunity and all it entails, Anthony Newman at Allica said: “We’re delighted to be named as headline sponsor of the NACFB. The Association and its Members have been a huge support to Allica since we opened our doors and have been a pivotal part of our growth journey. “We’re especially pleased to be able to pay that forward now by strengthening our partnership with the NACFB, who have proven themselves to be a vital voice for championing the interests of brokers and businesses alike. The whole Allica team looks forward to working with the NACFB on their plans for 2022 and beyond.” The headline sponsor receives the highest level of visibility and promotion throughout the NACFB community. Support sponsors benefit from enhanced branding exposure at NACFB flagship events and other key platforms. We welcome and thank them all for their continued support. 6 | NACFB

The new Directors join Mike Deacon (Asset Based Finance & Leasing), Mike Geddes (Asset Finance Solutions UK), Phil Gray (Watts Commercial Finance), and Steve Olejnik (Dovecote Property Finance) who were re-elected to their positions. Further, a three-year extension was approved for Independent Director Lieutenant Colonel Russell Lewis MC and a one-year extension for Finance Director David Newborough. Whilst the NACFB remains a Member first organisation, the Association also welcomes continued lender presence on the Board. For this year, the NACFB was pleased to welcome two new Patron Directors: Nick Baker (Allica Bank) and Andy Taylor (Haydock Finance). They replace Martine Catton (Just Cashflow) and Dave Furnival (NatWest) who have completed their respective terms. We are indebted to both Martine and Dave for the insight and invaluable guidance they have brought to the Association over their tenure.

Note from our Sponsor

Carefully does it The burgeoning opportunity to support care home operators

Anthony Newman Specialist Business Development Manager Allica Bank

are home operators have had more than their fair share of challenges during COVID. But despite this, the sector has been a healthy source of commercial mortgage activity, especially as the impact of the pandemic on care homes looks to be receding. Here at Allica, this has not gone unnoticed by our broker community. Alongside seeing a growing number of care home transactions come our way, many brokers have started to explore opportunities with us to support clients in the sector for the first time. Of course, the UK’s ever-growing elderly community is no secret, and has created robust demand for high-quality later-life care for many years – demand that doesn’t look set to slow down any time soon. But it begs the question, why are we seeing so many transactions right now? And what can you do to get involved?

remaining in the sector are largely looking to expand their portfolios and have been happy to snap up those properties being put on the market. Alongside this changing of hands, we’re also seeing an increasing number of new operators enter the market, eager to add value to the sector. It’s created an exciting opportunity for brokers to help reset the care home landscape.

Nuance and know-how The main barrier to entry for brokers is the unique nature of the sector. Issues such as staffing shortages and COVID relief packages are common across many industries, but how they’ve been applied to the care home sector stands out. And there are several extra factors lenders will take into account, too. For example, the care home’s Care Quality Commission rating; the number of beds; demand and local competition; and whether the property is a purpose-built care home or a conversion. Many lenders will also measure serviceability on a client’s cashflow (CFADS) and cash position when it comes to debt service, too, rather than a more typical earnings before interest, taxes, depreciation, and amortisation (EBITDA) assessment.

Alongside a need to increase the UK’s total stock of care home beds to meet the demand of an aging population, the identity of care home operators is shifting, too. And very few are looking to stand still!

It makes in-depth knowledge of both the sector and the application process even more important than with a ‘standard’ deal. This is exactly why Allica Bank launched a specialist care home team last year, dedicated to supporting brokers with care home transactions. The idea was to empower brokers without that experience, by allowing them to work in partnership with someone that does.

Many longstanding operators have seen the burdens of the pandemic as the perfect catalyst to retire or sell up, while on the flip side, those

Is this an opportunity you’d like to leverage, too? Reach out to us at introducers@allica.bank. We’d love to support you.

A changing landscape

8 | NACFB

Industry News

Industry News 1. Residential mortgage lending hits 14-year high

5. Aim companies raise more than £9 billion in 2021

2021 was the strongest year for residential mortgage lending in 14 years, with £316 billion of home loans issued according to data from UK Finance, the highest annual total since the £357 billion recorded in 2007. “We’re seeing a return to a stable path for new lending,” said James Tatch, head of data and research. He also said that more remortgaging activity is expected to take place in 2022 and that this could accelerate further in 2023.

Data from the London Stock Exchange Group show that in 2021 the junior stock market enjoyed its best fundraising year in 13 years. The total of equity capital raised on the Alternative Investment Market (Aim) exceeded £9.4 billion. The data show that 64 companies were admitted to Aim last year, making it the market’s most active year for floats since 2014. A broad range of sectors and companies joined including tech, healthcare, and SMEs with valuations in the tens of millions.

3 3. Shortages and planning delays threat to SME builders

2 2. Commercial landlords struggle to fill office space 64% of the UK’s commercial landlords are struggling to attract tenants to traditional offices due a rapid change in working patterns brought about by the pandemic according to research by workspace provider infinitSpace. UK commercial landlords currently dedicate an average of 33% of their office portfolio to some form of flexible or co-working spaces. By 2026, this is forecast to rise 11% to 44%. Those who don’t change their business model could find tenants elusive. 10 | NACFB

6. Half of all SMEs expected to raise prices in 2022

Worsening shortages of materials and labour combined with planning delays will hamper housebuilding in Britain in the next 12 months, according to a survey conducted by the Home Builders Federation, Close Brothers Property Finance and Travis Perkins. Nearly 80% of housebuilders said the supply and cost of materials such as bricks, timber and cement posed a huge problem, compared with just 20% this time last year.

Half of all small businesses in the UK plan to raise their prices this year according to a survey by accountancy network Moore UK which also found that one in three plan to make redundancies now the safety net of furlough has been removed. Those planning to make redundancies are on average considering shedding 45% of their workforces over the next six months. Commenting on the findings, Maureen Penfold, Chair of Moore UK, warned: “Policymakers should be careful not to assume that the economy is back in rude health.”

4. Corporate insolvency numbers on the increase

7. Britain’s economy to outpace rest of the G7 in 2022

For the first time since the start of the pandemic, the number of monthly registered company insolvencies was higher than pre-pandemic levels, according to figures released by Gov.uk. In November 2021 there were 1,674 insolvencies, up 88% on 2020, and up 11% on 2019. This figure is expected to increase further in 2022 as government support packages end and companies face increasing costs, supply chain challenges, and staff shortages.

The UK is on course to grow faster than every other nation in the G7 in 2022 according to analysts at Goldman Sachs. The bank’s economists predict the UK will grow by 4.8% in the coming 12 months, well above the 3.5% predicted for the US, 4% for Germany and 4.4% for both France and Italy. Canada and Japan’s GDP are also set to grow significantly slower. The IMF also expects Britain to outgrow the rest of the G7 club in the coming year.

Broker a great deal Our Business Development Team understand that every deal is unique. That’s why they work with you and take the time to understand your client’s needs, o�ering tailored �nancial solutions to drive business forward. Talk to us today.

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Membership News

Membership News Net zero difficult to reach for period property owners

Allica Bank approved for Recovery Loan Scheme

New research published by Together has revealed that the majority (79%) of British homeowners whose properties were built before 1900 are aware they will need to make changes to dramatically cut their home’s carbon footprint. However, most (57%) don’t know what improvements are needed to increase energy efficiency.

Allica Bank has been accredited for the Recovery Loan Scheme (RLS), becoming the first bank outside of the original CBILS lenders to be approved for the scheme.

The lender highlighted this huge “awareness gap” following government proposals to decarbonise all sectors of the UK economy to meet net zero targets by 2050. In terms of housing, estimates suggest the drive for a net zero future will impact about five million of today’s period homeowners. The research also found that the average period homeowner would only be willing to spend £5,480 in total on their sustainable home improvements, even though the actual cost could be more than three times that amount. Installing a heat pump which can reduce a household’s carbon footprint by 2.5 tonnes of CO2 per year can cost up to £18,000. Commenting, Scott Clay at the NACFB Patron, said: “There is no overnight solution, but there are methods to help turn the tide. Specialist lenders are a huge piece of making this puzzle a lot simpler, offering bespoke financial support to those with more complex properties and financial circumstances.” 12 | NACFB

Under RLS, the NACFB Patron will be offering asset finance to begin with, followed by commercial property finance later this year. It will mean even more businesses can benefit from Allica Bank’s relationship and tech-driven service, enabling the Bank to accept applications from businesses who may have fallen outside its standard lending criteria. Originally due to end in December 2021, the scheme was extended to June this year, providing a boost to the UK’s SME contingent in a time of crucial economic recovery. Conrad Ford, chief product officer, said: “To be the first non-CBILS lender to be approved for the Recovery Loan Scheme is a real boon for Allica. Our mission, since day one, has been to empower established SMEs with expert human support, backed up with a seamless digital experience. These features have never been more important for business owners than during this pandemic, and we’re pleased that established SMEs affected by it will now have even more choice.” Allica focuses on the SME market and gained full banking authorisation from the Prudential Regulatory Authority in September 2019.

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Membership News

Membership News KSEYE to enter BTL and development finance markets

Buy-to-let landlords don’t like being called landlords

Bridging lender KSEYE is looking to expand into longer-term buy-to-let products and development finance in the near future.

The majority of the buy-to-let community say they would prefer not to be called “landlords”, according to research from Mortgages for Business.

Jitendra Khagram, director at the NACFB Patron said that, although the firm’s current focus is on short-term property finance with loan terms up to 24 months, it is looking to expand its product suite to become “a one-stop shop for all commercial and investment property-based lending requirements”. He said that KSEYE and bridging generally had had a good year in 2021 because bridging lenders could be more flexible and act more quickly to get deals done than many longer-term providers. At the end of last year KSEYE’s loan book was hovering around £120 million consisting mostly of short-term bridging loans with terms of around 12 months. The diversification strategy is part of KSEYE’s plans to strengthen the loan book alongside attracting more lenders and clients, including property developers. According to Khagram, demand for bricks and mortar has continued despite the pandemic and because supply remains limited meaning significant price growth in the years to come is likely. To support their plans KSEYE also expects to grow its team up to 30% in 2022. Last year it made several new recruits to both the underwriting and sales and marketing teams. 14 | NACFB

Some parts of the US media have reportedly stopped using the word “landlord” due to complaints from the buy-to-let community. When it came to the UK, a majority of those surveyed by Mortgages for Business (59%) said they wanted the British media to stop using the word “landlord”, too. The NACFB Member firm asked landlords if they thought the term was “dated”; 59% agreed it was. When the poll also asked about their preferred name 43% said “small housing provider”, 36% said they would prefer to remain “landlords”, and 21% suggested other options – including “rental accommodation provider” (7%). Additionally, almost three-quarters of those surveyed (73%) told Mortgages for Business they felt “unfairly portrayed as this generation’s financial bogeyman”. Only 8% felt that landlords were not “financial bogeymen” at all – while the remainder (19%) accepted that their notoriety might not be entirely unwarranted. Commenting on the findings, Gavin Richardson, managing director at the NACFB Member firm said: “Sections of the media have vilified the buy-to-let community... The term carries much more baggage than it once did. No wonder the community wants a rebrand.”

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Patron Profile

The future’s bright The future’s professional and commercial Mike Davies Head of Business Development YBS Commercial

hen 2021 began, we had great hopes that things would get back to normal. Now that year is at an end, it is clear it was far from normal but despite the unusual challenges we have delivered some great outcomes for our borrowers and brokers. Our lending grew by 150% and we’re proud to have been able to support more borrowers who have needed us more than ever before. We have also built stronger, better connections with our brokers as well as increasing the broker panel by 50%. This has been achieved by increasing the number of relationship directors alongside the steps we have taken to unwind policies introduced at the start of the pandemic. For example, we are now lending again in the leisure sector. We also listened to broker feedback and have launched a variety of new propositions designed to support the market in the best way possible.

Our proposition At the very start of lockdown, we took the decision to keep on lending and to continually find ways to increase our overall levels of lending. This proposition remains unchanged and our commitment to the commercial real estate sector in the UK is undiminished. In 16 | NACFB

fact, we’re aiming to maintain the momentum we generated in 2021. We are clear about where we see ourselves in the market and where our product and service best meet the needs of borrowers and brokers. Our service proposition is based around brokers and borrowers getting a personal service from us by always having a named contact in our team to support them at every step, from application to completion. In support of this personal service, we are introducing more automation to enhance the efficiency and use of the broker portal. Our product range has been developed with experienced portfolio investors in mind. Our buy-to-let range features fixed rates as well as specialist products designed to serve the holiday let, HMO and semi-commercial markets, all of which can be blended to support a portfolio investor. Similarly, our commercial investment product works well for a broad range of industry sectors and again, can be tailored to meet the needs of experienced portfolio investors.

The market in 2021 In the commercial market, one of the year’s success stories for lenders, brokers and borrowers was the surge in demand for holiday lets. With foreign travel largely out of the question, we witnessed a huge increase in people holidaying in the UK. Lenders responded with specialist products, and brokers supported clients who recognised and capitalised on the opportunity. The buy-to-let sector also saw significant growth as a result of increases in demand for housing, and higher house prices. Experienced investors

“

The commercial property sector is at the core of the UK economy, and will remain an essential part of any post-lockdown economic recovery

expanded their portfolios, and there’s been a trend towards professionalisation in the sector. What is clear, is that the commercial property sector is at the core of the UK economy and will remain an essential part of any post-lockdown economic recovery. By remaining open to new business at the start of the pandemic, we maintained our support for investment, and accelerated that support throughout 2021.

Looking forward I expect that investors’ demand for quality properties and growing sectoral confidence will result in increased levels of commercial lending in 2022. For YBS Commercial, we will continue our focus on broker service, delivered through dedicated points of contact with strong working relationships, and by increasing our lending appetite even more. As for the pandemic – we’re optimistic. The past 18 months stand as testament to the resilience of the commercial finance market

as a whole and the participants in the industry: brokers, investors, lenders, and professional firms. At YBS Commercial, in 2022 we’ll be striving to enhance our propositions and our range, continually improving what we do. Taking a broader view, any further increases in interest rates will impact the sector as will any regulatory changes, but we believe that the commercial real estate sector in the UK is robust and can bear systemic shocks. With balanced decision making at regulatory and governmental levels we see 2022 as a year where opportunities can be taken. Finally, there is the impact of technology, which was moved on significantly by the pandemic. Here at YBS Commercial, we have embraced a hybrid approach to work and recognised the wider role that technology will play on the sector in future. For example, the increased use of Application Programming Interface (API) technology which saves time and money, helps to reduce risk and allows brokers to concentrate on the things that matter, like customer service and relationship-building. Whatever 2022 brings, we feel confident that as a sector, as we’ve proved so many times over the last 18 months, we’ll be ready for the challenge! NACFB | 17

Compliance

Healthy conversation You’ve got to keep on talking Erica Meredith Senior Compliance Officer NACFB

inimum Standards Reviews establish the NACFB marque as one that can be trusted by SMEs and throughout the commercial lending markets. We have been carrying out MSRs with our Members for several years now, and on the whole, feedback has been very positive. These reviews are a health check, not only to ensure business compliance, but also to develop the conversation between Members and the NACFB, especially the compliance team. They help us to understand your business, how you operate, and the processes and documents you use every day. This insight allows us to work together to achieve the highest standards of commercial finance broking. Without the conversation, the scope of support we provide can often get lost by Members who are, quite rightly, focused on their everyday 18 | NACFB

business objectives. However, I believe that much of the work we do directly supports Members’ everyday business objectives, not only from a compliance perspective but by helping to reduce the time spent on numerous tasks. Recently, we have been working hard to improve our Minimum Standards Reviews with the aim of ensuring the conversation is not viewed as an irritating Q&A box-ticking exercise by Members, rather as a way of finding solutions that work whilst causing minimum inconvenience to existing processes.

“

I know we have the full support and guidance of the Association whenever we need it

Our most recent improvement relates to the way in which we share our MSR findings with Members. We wanted the results to be easily digestible so that any next steps can be approached with clarity. So, we introduced an A to D grading system to shine a light on the mandatory legal and regulatory requirements as well as the NACFB’s Code of Practice. We also established a similar system (1 to 5) to rate the non-mandatory elements, i.e., the nice-to-dos. From these, a combined score is created, for example, A1 (top score), and C3 (minimum acceptable score), and variations thereof. These scores are private and made available only to the Member and the NACFB administration team. However, some Members choose to share them with Patrons in order to aid a lighter touch during Patron audits. This is a significant time-saver. We aim to carry out an MSR with each Member firm every one to two years. In between times, the conversation continues. Throughout the working week, Members can contact our helpdesk by phone or email to gain answers to a multitude of queries from across the compliance landscape. For out of hours support, our website hosts an FAQ page which answers all the most commonly asked questions. Members also have 24/7 access to our downloadable business and compliance templates. Currently, there are around 70 of them, all of which are updated at least annually as well as when there is a shift in regulation. You might remember, this time last year when the rules around commission disclosures changed. We amended the Terms of Business template to reflect the new FCA ruling. Like the MSRs and the helpdesk, the templates are free to Members, just login to your account to access them. They support best practice

as well as saving Members time having to create their own. Available in a Word format, they can be modified to incorporate business details and edited to fit your brand. We are particularly proud of our online training provision. Again, included in the membership fee, these bite-sized courses support our Members with their personal development covering subjects from compliance and regulation to business and commercial lending as well as health and safety. Again, to save time, the system keeps a record of all courses taken by Members for CPD purposes. We have also been quite vocal about our partnership with Red Flag Alert which operates a platform that helps Members to monitor any UK company – not only a timesaver but crucial for helping to verify that clients and deals are legitimate. Initially we secured 6,000 free searches for Members and once that threshold is reached, a specially reduced rate of just £1.75 per search will kick in. And so the conversation continues. Over the coming months, I plan to share with you further updates on how the compliance department is developing to support Members. For now, though, I’ll sign off with words from a relatively new Member firm, Apex Funding, which echoes our commitment to keep on talking. “I had the pleasure of meeting Ann and Erica, who helped us to become Members and even advised on outstanding elements of compliance along the way. It’s a seamless process and the team were fantastic. I am so pleased to have joined as I know we have the full support and guidance of the Association whenever we need it, allowing our team to offer finance solutions with confidence.” NACFB | 19

Ask the Expert

Fair play

Understanding Islamic finance

Hassan Daher Founder & CEO Qardus

ue to a lack of Sharia-compliant financing alternatives, UK Muslim business owners often resort to raising finance through equity or reinvesting profits to fund growth. However, this situation is changing. Step forward NACFB Patron, Qardus; the first ethical and Sharia-compliant business financing platform for SMEs in the UK. We asked founder and CEO Hassan Daher to explain more.

What is Islamic finance?

Islamic finance offers an alternative approach to finance based on the principles of Islam. A core principle of Islamic finance is that the payment and receiving of interest is prohibited. Another core principle is that financial activities should not cause any harm. Islamic finance is therefore strongly aligned with ethical and sustainable business practices often referred to as environmental, social and governance (ESG).

If the lender doesn’t charge interest, how does it make money? Instead of charging interest, financial institutions make money by generating profits using various contracts that 20 | NACFB

are allowed under Sharia law. These activities must be linked to a real economic transaction, and often involve entering into sales, leasing and partnership arrangements with their clients to meet their funding requirements.

How much does Qardus typically lend and for how long? We offer business finance from £50,000 to £200,000 with terms starting from six to 36 months. Our facility requires a personal guarantee with no other security required. This means our SMEs can receive financing more quickly and easily without the need to have fixed assets to offer as collateral. In an asset-light, service economy like the UK, the requirement to have tangible fixed assets in the business can create a barrier to growth for SMEs.

Is Islamic finance only available to Muslims? No. Islamic finance is available to all enterprises and people irrespective of faith or background.

Do brokers have to be Muslim to introduce business to Qardus?

No. Any NACFB broker can register and get in touch with us directly or via our website to learn more about our referral criteria.

What types of SMEs will you finance? We finance all UK SMEs across various sectors that meet the following eligibility criteria: limited liability company with UK registration; minimum two years’ trading history; no outstanding CCJs; and stable cashflow. Non-Sharia compliant business activities are excluded such as conventional finance (non-Islamic banking, finance and insurance, etc), alcohol, pork-related products, non-halal food production, packaging and processing, entertainment (casinos, gambling and pornography), as well as tobacco, weapons, arms and defence manufacturing.

How has the pandemic affected Qardus’ lending programme?

We launched during the pandemic in July 2020, which was to our advantage because as a fintech company, we were able to quickly adjust our credit criteria and streamline our processes to make them more robust to cope with the economic conditions.

How do you see the future of Islamic financing in the UK?

In the UK, the British Muslim community is massively underserved, especially when it comes to business financing options for SMEs. We feel Islamic finance is just getting started and are optimistic going forwards due to the economic recovery.

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Special Feature

Consider the alternative The new normal in recession recovery Peadar O'Reilly Managing Director Praetura Group Lending Division

istorically, many businesses have gone bust coming out of recession. Conventional wisdom suggests that companies starved of working capital will struggle to recover from downturns and often fall into insolvency. Often this stemmed from a mismatch between a business’s cash requirements and readily available finance options. This rationale governed recessions of the past, but thanks to the new market conditions shaped by the events of 2008 and 2009, we will see far less cash starved businesses going bust from our latest economic dip. In 2008, we saw the failure of large high street lenders create a shattering effect on western economies. Following one of the most severe economic crashes in recent financial history, some lenders went into ‘crisis mode’ subsequently resulting in risk averse credit decisions being made which inhibited the options available for businesses to access capital. Companies looking to rebuild their positions post-recession found themselves with both diminished cash reserves and limited finance options. Due to tightened credit criteria, many failed to meet major high street lenders’ high credit hurdles and low risk appetites, so their loan applications were turned down. With nowhere else to turn, business leaders were often forced to close their doors. At the peak of the financial crash in 2008, 6,961 insolvencies were recorded in just one quarter, the highest in UK history. However, even as the economy recovered, insolvencies remained at record levels hovering around 5,000 per quarter for the following four years. This shortfall in the supply of mainstream debt finance against an 22 | NACFB

ever-increasing demand from businesses led to the boom in ‘alternative lending’ that has been evident over the last decade. Unfulfilled funding requirements were met by non-bank lenders who had greater flexibility to evaluate a business beyond its direct credit history and a more focussed and agile approach when it came to assessing credit worthiness. The prevalence of property, asset and invoice-based lending rocketed as a myriad of funding structures were developed to better meet SMEs’ constantly evolving requirements. Weak business models can be exposed during a recession and ensuing credit crunch, but a lack of capital shouldn’t limit businesses that can prosper. For example, complex industries such as automotive and aerospace manufacturing have long production lead times with a web of subcontractor relationships. As the economy recovers from a recession, these types of businesses tend to require additional working capital support to allow them to capitalise on growth opportunities in the medium term. Many have successfully turned to alternative lenders to provide financing structures that are dynamic and holistic in their nature and will continue to do so for the foreseeable future. The landscape that emerged could sometimes be difficult to navigate for business owners in terms of understanding the available options and determining the suitability for their situation, which is where the role of brokers became and has continued to be pivotal.

“

The alternative lending market will continue to be a key facilitator to support the growth of UK SMEs

When asked about the current SME funding landscape, Tom Brown one of the directors of PMD Business Finance commented: “The alternative finance marketplace has been buoyant for the past ten years and this has only been amplified further in the last 18 months. Business owners want to work with brokers and lenders who understand their business and can explore a number of different options to support their needs. “The funding options available to SMEs are wide ranging, it’s not a case of one size fits all, or sticking all your eggs in the ‘bank basket’ anymore. Well established reputable brokers, working in partnership with trusted lenders are perfectly positioned to support this transition.” The recent pandemic is likely to have compounded the growth of alternative lending. In early 2021, law firm Walker Morris released

data to suggest that 45% of UK businesses were uncertain of the options and relative merits of the various forms of alternative finance. However, UK government-backed COVID loans such as CBILS, BBLS and RLS have helped open the minds of UK SMEs to the merits and availability of the range of non-bank lending options available to them. The alternative lending market will continue to be a key facilitator to support the growth of UK SMEs, and it is also expected that the number of consolidations and acquisitions will continue to increase more rapidly than the number of insolvencies. Access to appropriate and properly structured debt funding, from funders who are proactive, flexible and adaptable, working in partnership with brokers, will give businesses a key advantage in a competitive and constantly evolving marketplace.

Special Broker Feature Survey 2021

Life through a lens A lending snapshot of 2021 Norman Chambers Managing Director NACFB

his year started in a better place than last. The Omicron coronavirus variant that had threated to cause Christmas chaos, seems to be in retreat. There is confidence that we may very well have had the last lockdown and businesses can begin to tentatively plan for life after the worst of COVID-19. But 2021 was different, not least because of the vaccine roll out, which tentatively enabled SMEs to pick up the pieces and resume trading. 2020 and the start of the pandemic saw a race to facilitate emergency funding, in large part via the intermediary route to market, but 2021 saw those initial loan schemes end. Returning for a third year, the NACFB annual survey seeks to shed light onto the activities of the Association’s membership throughout the last twelve months. The comprehensive analysis 24 | NACFB

captures a snapshot of another busy year of funding. The results attempt to frame a developing narrative, one that unequivocally points to the inherent value and merit of modern commercial finance broking. The survey is reactive and evolving. Each year, we assess the methodology and tweak accordingly, but the results are presented as we find them. Where we see anomalous results, we don’t discard them, instead we examine what may cause them and how this can help us better extract information the following year. This year’s survey was completed by over 300 brokers, the resulting sample size gives the Association a 95% confidence level when extrapolated across the entire membership. Where both possible and relevant we have also included comparative data from 2019 and 2020, this trajectory helps us to track trends and monitor areas of growth, stagnation, and occasionally, decline. The NACFB is very grateful to all those who took the time to compete the survey, and our congratulations goes to both Lynda Bradbury of Tafco and David Farmer of Lime Consultancy both of whom won a £500 John Lewis voucher.

How many NACFB brokers are there?

What gender are NACFB Members?

At the end of 2021, there were 2,030 brokers from 1,033 Member firms operating under the NACFB kitemark.

The gender split of the NACFB in 2021 was 85% male and 15% female. In 2019, there were 3% fewer women Members. Although incremental, this does point to a slow but steady movement towards gender parity.

85%

15%

How old are NACFB Members?

4 18-24 years

25-34 years

10%

35-44 years

Less than one year: 5%

20% 1-3 years: 16%

45-54 years

20+ years: 21%

30%

55-64 years

29%

65+ years

I would prefer not to answer

How long have NACFB Members been brokers?

4-8 years: 25%

13-19 years: 19%

9-12 years: 14%

The average age of an NACFB Member in 2021 was 49. All NACFB Members who are over 65 remain men, but there is growing gender parity in the lower age groups.

Brokers arrive at the profession via all manner of entry points. On average, NACFB Members have been brokers for 10.5 years. A quarter of the membership have been a broker for between 4-8 years. 40% of Members have maintained their career for more than 13 years. Roughly half of this 40% have been a broker for more than two decades.

We asked respondents for their primary area of business activity. Whilst we know that brokers often offer a suite of finance solutions, many will have a core specialism. It is through this lens that we view other questions, for example, if we wanted to know the average size loan in the unsecured finance space, we only analyse the data of those who selected the finance type as their primary area of business activity.

5 What are the primary areas of business activity for NACFB Members?

For the third year in a row, the most populous primary area for Members is commercial mortgages, which has remained consistent at approximately a third of the membership. Indeed, 59% of the NACFB membership in 2021 had a primary area that was within the broader property finance space. After a peak in 2020, there has been a slight decline in the number of asset finance Members and for the first time the data also warranted the addition of another finance type, with M&A finance making its debut. During times of economic hardship, an increase in the financing of SME acquisition and consolidation is to be expected.

Type of finance

2021

2020

2019

Commercial mortgages

34%

29%

34%

Leasing & asset finance

22%

28%

24%

Buy-to-Let finance

13%

14%

15%

Development finance

12%

13%

10%

Unsecured finance

Short-term & bridging loans

Factoring & invoice finance

Cashflow finance

M&A finance

n/a

6 What are NACFB Members’ secondary areas of business activity?

Rarely will a broker operate just within their primary area of business activity. We asked Members to list the other areas they service and have compiled their most frequent responses.

1st

Buy-to-Let finance

Cashflow finance

Commercial mortgages

Development finance

Factoring & invoice finance

Leasing & asset finance

Short-term & bridging loans

Unsecured finance

2nd

Commercial mortgages

Development finance

Commercial mortgages

Leasing & asset finance

Unsecured finance

Commercial mortgages

Leasing & asset finance

3rd

Short-term & bridging loans

Unsecured finance

Short-term & bridging loans

Commercial mortgages

Factoring & invoice finance

Development finance

Cashflow finance

4th

Development finance

Buy-to-Let finance

Unsecured finance

Cashflow finance

Buy-to-Let finance

Commercial mortgages

7 Diversified offering

How did NACFB Members adapt in 2021?

Average across membership 41% 5% 54%

Refined offering Stayed the same

Buy-to-Let finance

27%

Cashflow finance

66% 86%

Commercial mortgages Development finance

57%

17%

Leasing & asset finance

58%

38%

Factoring & invoice finance

14%

40%

66% 3%

43%

M&A finance

54% 100%

Short-term & bridging loans

44%

Unsecured finance 0%

20%

50% 10%

53% 40%

60%

37% 80%

100%

For the first time, we asked NACFB Members how they adapted to the challenges of 2021. We wanted to know, by a Member’s primary area of business activity, if they had sought to diversify or refine their offering. Anecdotally, we have heard of Members broadening the types of finance they offer to clients as well as specialising to meet areas of increased demand. 54% of Members did not change their offering, that isn’t to say they didn’t adapt last year, they may already have been well placed to service clients. However, 41% of Members did diversify their offering, with only 5% electing to specialise and refine their service.

8 Where in the UK were funds utilised?

Ranking 1 2 3 4 5 6 7 8 9 10 11 12

Area of UK East Midlands Greater London East of England South East North West North East South West West Midlands Yorkshire Wales Scotland Northern Ireland

The NACFB asked survey respondents to rank UK regions in order of where their clients’ funds had been utilised in 2021. The results were quite surprising. The East Midlands came out on top followed by the less surprising regions of Greater London alongside both the South and East of England. The East Midlands coming out on top could be explained by several factors, including capital flight from London and less SME activity during the six months of lockdown. The region is also at the heart of UK manufacturing and advanced engineering, accounting for 20% of UK manufacturing output. Finally, East Midlands lender First Enterprise became one of only 40 newly accredited lenders by the British Business Bank within the Recovery Loan Scheme last year, although this is unlikely to account for any sharp upticks.

NACFB | 27

9 By finance type, where in the UK were funds utilised? The regional breakdowns were further segmented by a Member’s primary area of business activity. Here we can see the East Midlands regularly topping the areas where funds have been utilised.

Buy-to-Let finance

Cashflow finance

Commercial mortgages

Development finance

1. East Midlands

1. Greater London

1. East Midlands

2. Greater London

2. East Midlands

2. Greater London

3. East of England

4. North West

4. South East

4. North West

5. South East

5. North East

5. North West

5. South East

Factoring & invoice finance

Leasing & asset finance

M&A finance

1. Greater London

1. East Midlands

2. South East

2. Greater London

3. East Midlands

3. East of England

3. South East

4. East of England

4. South East

4. East of England

5. South West

5. North West

Short-term & bridging loans

Unsecured finance

1. East Midlands

1. Greater London

2. East of England

2. East Midlands

3. North West

3. South East

4. North East

4. East of England

5. Greater London

5. North West

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10 773

800

How many clients do NACFB Members have?

600 500

439

400

420

340 300

287

300

325

191

200

142

100

fin M&A an Sh ce br ort idg -te in rm gl oa & ns Un se c fin ure an d Av ce er me age a mb cr er oss sh ip

0 Bu yto fin -Le an t ce Ca sh fin flow an ce Co mm mo er rtg cia ag l es De ve lop fin men an t ce inv Fac oic tor e fi ing na & nc e L as ea se sin t fi na g & nc e

On average an NACFB Member has 420 active clients. This client total does however vary according to finance type. As you would expect, those operating in the leasing and asset space (which typically sees lower ticket value but higher volumes) have on average 773 clients. Whereas inversely development finance Members have on average 191 active clients.

Average number of clients per brokerage

For the first time ever, we asked just how many active clients our Members have. Again, this is filtered by a Members’ primary area of business activity. We defined client as approximately how many SMEs Members have sourced finance for over the last five years, but this definition remains up for debate.

694

700

The survey data reveals that in total, the NACFB membership welcomed 146,885 new clients to their roster last year. 21% of the membership had less clients in 2021 than in 2020, whilst 56% saw their active client base grow.

11 35

Across the entire membership, just 16% of transactions fell within the FCA’s regulatory perimeter, this includes a third of all short-term loans and 28% of buy-to-let deals.

30 | NACFB

On average, just 16% of NACFB Members’ deals were regulated

25 20 15

33% 28%

10 17%

5% 11%

11%

y-t fin o-Le an t ce Ca sh fin flow an ce Co mm mo e rtg rcia ag l es De ve lop fin men an t ce inv Fa oic cto e fi rin na g & nc e as Lea se s t fi ing na & nc e M& A fi na nc e S br hor idg t-t ing erm loa & ns Un se fin cure an d ce

We sought to know just what percentage of NACFB Members' transactions were regulated. This information is increasingly important as this year the FCA looks to implement sweeping changes. The regulator is adopting a ‘use it or lose it’ approach meaning that firms that have not used their regulatory permissions in the last 12 months are at risk of having them revoked.

How many deals were regulated?

95%

How did Members adapt to commission disclosure changes?

67%

80%

81%

75%

38%

13%

14%

17%

11% 8%

20%

66%

17%

27%

40%

33%

43%

60%

49%

57%

80%

83%

100%

Co m mo mer rtg cia ag l es De ve lop fin men an t ce inv Fac t oic or e fi ing na & nc e as Lea se sin t fi na g & nc e M &A fin an ce Sh o br rt idg -te in rm gl oa & ns Un se c fin ure an d ce

Ca sh fin flow an ce

Bu yto fin -Le an t ce

Did not amend commission disclosure wording

Do not know

Amended commission disclosure wording

Last February, the NACFB wrote to all Members making them aware of the changes affecting regulated firms regarding disclosure of commissions. New FCA regulations meant that all regulated brokers would be subject to new rules in relation to how commission received from lenders is disclosed to clients. Amendments applied to both the Terms of Business Agreement and Suitability Letter documents. Although the changes only directly apply to regulated firms, the Association encouraged all firms to adopt this revised approach as a best practice.

75% of NACFB Members made changes to their commission disclosure arrangements

In light of the changes, we asked NACFB Members if they had made changes to commission disclosure arrangements found within their Terms of Business Agreement in 2021. In total, 75% of the membership made amends to accommodate regulatory changes, whilst 17% did not. This does not necessarily mean 17% have not disclosed their commission arrangements in a compliant manner, indeed anecdotally many firms were already fully disclosing commission prior to the FCA’s changes and therefore were already compliant.

13 Whilst championing the intermediary route to market, the NACFB goes to great lengths to articulate the additional value Members add to the client’s funding journey. We are also keen to be able to quantify this value. As such, for the first time we asked NACFB Members how long each transaction takes to complete.

How long does each transaction take to complete?

Average number of hours

300 250 200 150

272

100 50

148

103 35

Bu y-t o-L et fin an Ca ce sh flo w fin an ce Co mm mo e rtg rcia ag l De es ve lop fin men a t inv Fac nce oic tor e fi ing na & n as Lea ce set si fin ng & a M& nce A fi na nc S e br hort idg -te i ng rm Un loa & se cu red ns fin an ce

This timing accounts for how long an NACFB Member takes to complete each successful transaction, i.e., from enquiry to draw down. The results revealed that each broker firm takes on average 83 hours, but this varies significantly by finance type. Upon first inspection these don’t look too accurate. It could be that there was some ambiguity in the questioning, with Members potentially sharing the total amount of hours they and their teams expended, whilst others shared the total amount of time from enquiry to draw down. We shall refine the wording next year but have published the results anyway to remain transparent and to continue the ‘added value’ debate. 83 hours is the average time an NACFB Member takes to complete each transaction

14 What was the average transaction size?

Average size of loan Type of finance

2021 (£)

2020 (£)

2019 (£)

Buy-to-Let finance Cashflow finance Commercial mortgages Development finance Factoring & invoice finance Leasing & asset finance Short-term & bridging loans Unsecured finance M&A finance

363,720 444,643 569,078 1,137,652 695,833 79,811 269,375 127,794 791,667

318,750 445,556 619,534 1,291,739 477,778 130,434 479,808 149,853 n/a

355,599 n/a 519,029 1,570,774 371,667 51,091 544,318 139,737 n/a

Average across all finance types

£458,582

£391,345

£450,145

The average deal size across the entire NACFB membership last year was £458,582. This was a 17% increase on 2020’s total. Finance sectors with the biggest year-on-year average increase were development finance, factoring and invoice discounting and buy-to-let. The sectors of leasing and asset, commercial mortgages, and short-term bridging loans were all down on last year’s averages – with the former two closer to 2019’s averages.

45% of the membership said their average size transactions were at the same level as 2020, whereas 41% said that for them their average size of transaction had increased.

15 By value, how much business did Members introduce to lenders?

Type of finance

2021 total per sector (£)

Buy-to-Let finance Cashflow Commercial mortgages Development finance Factoring & invoice finance Leasing & asset finance M&A finance Short-term & bridging loans Unsecured finance

7,370,084,375 249,475,000 10,918,675,000 6,165,209,375 1,360,000,000 9,308,243,750 81,812,500 2,070,068,750 3,394,687,500

2,316,625,000 600,000,000 7,169,437,500 5,504,937,500 1,096,250,000 7,502,812,500 n/a 1,913,750,000 672,375,000

Total across all finance types

£40,918,256,250

£26,776,187,500

2020 total per sector (£)

The total amount introduced by NACFB Members in 2021 was

£40.9 billion.

17 Why was RLS use so low?

How many deals were through the British Business Bank’s Recovery Loan Scheme? Type of finance

6 8 10 10 5 14 8 5 21

Average across all finance types

4% 49%

15%

Average number of RLS deals

Buy-to-Let finance Cashflow finance Commercial mortgages Development finance Factoring & invoice finance Leasing & asset finance M&A finance Short-term & bridging loans Unsecured finance

16%

16% Lack of direct enquiries - 49% Clients did not meet criteria - 16% Standard term loans better met client needs - 15% Lack of scheme details - 4% Other - 16%

The Recovery Loan Scheme’s take-up was far lower than many expected. Approximately half of NACFB Members said the main reason was a lack of direct enquiries around the scheme, whilst 16% said their clients simply did not meet the scheme’s criteria. 15% of NACFB Members outlined that standard term loans better met their clients’ needs, which may have been an intentional aspect of the scheme’s design.

In place of BBLS, CBILS, and CLBILS, 2021 heralded the arrival of the Recovery Loan Scheme (RLS). Of the NACFB Members that engaged with the scheme, on average only 11 deals per brokerage were placed through it. As with the popular CBILS, the scheme was most utilised by Members operating in the leasing and asset space.

18 What was the average loan size within the Recovery Loan Scheme? Type of finance

As per the latest British Business Bank data, the Recovery Loan Scheme provided £1.06 billion of funding offered through 6,190 facilities via 76 accredited lenders. At the time of writing, £822.8 million had been drawn down through just 5,137 facilities. As expected, and by design, these figures are considerably down on the CBILS data from the year before. The average size RLS loan via an NACFB Member stood at £539,281 which is over twice the size of the average sized CBILS loan in 2020. This data suggests that when a business needed state-backed funding, their need was comparatively greater. The biggest RLS loans were taken out by brokers’ clients in the development, buy-to-let, and short-term spaces.

Buy-to-Let finance Cashflow finance Commercial mortgages Development finance Factoring & invoice finance Leasing & asset finance Short-term & bridging loans Unsecured finance M&A finance Average across all finance types

Average size of RLS loan (£)

Average size of CBILS loan (£)

766,667 426,786 404,891 945,395 760,714 125,298 645,833 215,441 562,500

114,583 243,056 250,368 618,478 163,889 157,398 302,885 197,059 n/a

£539,281

£249,283

19 How many deals were for clients refinancing existing arrangements? % of clients refinancing Type of finance

2021

2020

Buy-to-Let finance Cashflow finance Commercial mortgages Development finance Factoring & invoice finance Leasing & asset finance Short-term & bridging loans Unsecured finance M&A finance

50% 30% 35% 40% 37% 15% 41% 36% 7%

55% 48% 42% 45% 37% 24% 34% 40% n/a

Average across all finance types

32%

40%

We also wanted to know what percentage of deals were refinancing. 32% of deals placed by NACFB Members were refinancing of exiting loans, an 8% drop on 2020. Both buy-to-let and short-term and bridging loan brokers benefitted the most from clients refinancing.

Where did brokers get their business from?

Lead source

Returning customers

50%

Professional service introducers (e.g. lawyers, accountants and estate agents)

21%

Marketing initiatives

10%

Referrals from other brokers

10%

Referrals from lenders

Sector suppliers (e.g. construction firms and product suppliers)

Other

NACFB Members get their business leads from all manner of sources and a lot depends on the sector and type of finance. 50% of the membership said their biggest lead source was from returning customers, whilst 21% said they get most of their leads from professional service introducers.

21 How many lenders did brokers have on their panel? The average number of lenders on an NACFB Member’s panel is 117. The data has been filtered by a Member's primary area of business activity but also includes lenders across their entire panel. In 2020, the average size was 106 and in 2019, 101. As you would expect, there are a lot more short-term and bridging lenders in the market, as opposed to leasing and asset Members who have a smaller network of lenders to approach. 57% of the NACFB membership said they had more lenders on their panel in 2021 than in 2020, just 10% said they had less.

34 | NACFB

Primary area of finance

Average number of lenders across full panel

Buy-to-Let finance Cashflow finance Commercial mortgages Development finance Factoring & invoice finance Leasing & asset finance M&A finance Short-term & bridging loans gg Unsecured finance

148 138 116 144 130 52 123 209 126

Average across all finance types

117

What influenced a client’s decision? All manner of factors can impact a client’s final decision when choosing a particular funding option. We asked NACFB Members for the most common reasons, these included the ‘lowest rate’ at 44% and ‘certainty of funding’ at 19%.

Yes

Are more clients seeking green funding solutions?

No Don't know

100% 10%

14%

12%

13% 19% 33%

80%

Lowest rate 44%

Certainty of funding 19%

60%

Previous positive experiences 11%

92% 81%

80%

Speed to completion 7%

Speed of initial decision 4%

74% 100%

79%

70%

86% 40% 67%

20% Term flexibility 3% 10%

Lower additional fees 3%

10%

13%

11%

Ease of application submission 3%

Bu y-t fin o-Le Ca an t sh ce flo w fin an ce Co mm mo e r rc De tgag ial e ve lop s m fin en a t inv Fac nce oic tor e in Le fina g & as ing nce & fin asse an t ce M& A fi na nc S e br hort idg -te ing rm lo & Un ans se fin cure an d ce

Average across all finance types Sustainable practices 1%

Other 5%

79%

12%

Last year, world leaders convened in Glasgow for the COP26 climate summit. One of the key topics debated was that of sustainable finance. The number of lenders offering green funding solutions is growing, but is the demand from clients? We asked NACFB Members if they had seen an increase in clients seeking green funding solutions this year; 79% said they had not seen an increase.

24 Why did lenders say no in 2021?

Sector is deemed too risky

29%

Outside of lender criteria

25%

Poor credit

10%

Certainty of funding was a key factor in a client’s history decision when selecting a funding option, but what Debt utilisation were the lenders' reasons for declining a funding too high application? We asked NACFB Members for the Lack of strong most common reasons a lender declined a deal. cashflow At 29%, and top of the list of reasons was the sector being deemed too risky by the lender. Whilst some lenders specialise, anecdotally, the NACFB has heard of so-called ‘red flag’ sectors, i.e., business areas that lenders will not consider at a certain point in time due to market conditions even though their published lending criteria might suggest otherwise.

8% 5%

Not enough collateral

Amount too high

Affordability

Incomplete application/ paperwork

1% 15%

Other 0%

25 What were the ‘red flag’ sectors? 45% 31% Hospitality Retail Commercial property investment Construction Agriculture Automotive Healthcare

10%

20%

25%

30%

26 What regulatory changes do Members want to see?

8% 4% 2%

58% Simplification of compliance processes

New government-backed loan schemes

Greater clarity of the FCA's perimeter

18% 9%

More regulatory protection for SMEs

Greater SME coverage from FOS

Manufacturing

Residential property investment

Expansion of FCA's perimeter

Other

15%

1% 7%

So, we know some sectors are simply deemed too risky by some lenders, but which business sectors are these? Most brokers won’t need this question answering as the results do not come as a surprise. Both hospitality and retail, two of the hardest hit sectors by the pandemic, top the list.

For the third year in a row, the majority of NACFB Members wanted to see a simplification of compliance processes (58%). This is a challenge for the Association’s compliance team, who are tasked with isolating which aspects Members are finding overly complicated.

NACFB | 37

27 What do brokers perceive as the biggest threat to their business? Since the pandemic hit, NACFB Members have been at the frontline, providing stricken SMEs with critical business funding. But what do they perceive as the biggest external threat to their brokerage? The number one concern for NACFB Members is the increased cost of Professional Indemnity Insurance (PII). The Association is as close as it ever has been to providing Members with some respite from spiralling PII costs. Tellingly, whilst 75% of Members made amends to documentation following commission disclosure rule changes, some 12% of Members viewed the FCA’s moves as a future threat. Increased cost of Professional Indemnity Insurance (PII)

21%

Increased lender risk appetites

21%

Moves towards full commission disclosure

12%

FCA's ‘Use it or lose it’ approach to authorisation

9% 8%

Reduced lender panels 7%

Technology platforms 6%

Other regulatory tightening Lack of new talent

Industry consolidation

Threats from Claims Management Companies (CMCs)

Legacy/succession planning

Other

10%

15%

20%

25%

28 Technology: 1%

From which sectors did brokers receive the most enquiries?

Agriculture: 3% Professional services: 4% Healthcare: 4%

Trade finance: 1% Other: 2% Residential property investment: 24%

Retail: 6%

Automotive: 8%

Construction: 15% Manufacturing: 9%

Hospitality: 10%

38 | NACFB

Commercial property investment: 13%

29 Automotive: 1%

Agriculture: 2%

In which sectors did brokers see a slowdown of enquiries?

Technology: 2%

Other: 2%

Energy: 2% Healthcare: 3%

Retail: 24%

Residential property investment: 3% Trade finance: 3% Professional services: 5%

Construction: 8%

Manufacturing: 9%

Hospitality: 23%

Commercial property investment: 13%

30 In which sectors do brokers anticipate growth this year?

Trade finance: 1% Professional services: 1% Automotive: 2% Retail: 2%

Agriculture: 1% Other: 3% Hospitality: 19%

Technology: 4% Energy: 4%

Healthcare: 6%

£ Construction: 18%

Residential property investment: 11%

Manufacturing: 12% Commercial property investment: 16%

Special Feature

All change please Destination buy-to-let 2022 Angela Norman Head of Corporate Development Recognise Bank

his year is likely to be a year of change for landlords in the UK, marking a turning point for the buy-to-let market as we see an increase in the number of professional investors experienced enough to deal with the challenges facing the sector. First, is the impact of the Bank of England’s base rate increase to 0.25% in December. Although expected at some point, the pre-Christmas rise came as a surprise to many people and could be the start of a number of base rate increases over 2022. This will put extra cost on borrowing and could force landlords to increase the rents they charge their tenants. Such an increase had been widely predicted, so it’s no surprise then that since we launched our new professional buy-to-let mortgage in October, we saw a lot of interest in the fixed rate option as borrowers looked to lock in some certainty around monthly payments. I don’t expect the possibility of future bank rate rises to dampen demand for buy-to-let, because property investors are already searching for new acquisitions. This is partly driven by a desire to increase rental yield, resulting in landlords looking at properties outside of the traditional hot spots of city centres, which have seen less rental growth in recent years. The private rented sector is also being driven by changes in tenant behaviour brought about by COVID. Many people have spent months working from home, so they are now re-evaluating where they want to live, looking farther afield for bigger properties, homes with gardens or in less built-up areas. This is going to be a growing trend as companies continue with their flexible working policies, because employees won’t have to commute into work as often as they did before the pandemic. 40 | NACFB

This shift in working patterns is also having an impact on property usage. Many companies are looking to downsize their city centre offices because of flexible working practices, resulting in borrowers looking to finance change-of-use projects, turning commercial spaces into residential or mixed-use developments. Similarly, the resurgence of build-to-rent developments, such as those being planned by John Lewis, is helping to re-shape the letting sector, while also raising expectations from tenants around the quality and facilities available to them from rented accommodation. All these factors will increase the pressure on landlords, probably leading to smaller investors leaving the sector. It’s one of the reasons we designed our professional buy-to-let product for borrowers with an existing portfolio of four properties or more, helping them to acquire high quality properties and supporting landlords as they deal with the changes on the horizon. As these challenges present themselves, the role of the adviser will be vital in helping borrowers understand the impact on their finances and matching them with lenders that are equally experienced in the buy-to-let sector, working together to provide property investors with the right lending solutions.

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I don’t expect the possibility of future bank rate rises to dampen demand for buy-to-let, because property investors are already searching for new acquisitions

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Industry Insight

Tip of the iceberg Finding £120 million in missed broker fees Mark Hawthorn CEO LDS Sales Guarantees

esearch by the National Housing Federation has shown we need to build 340,000 new homes every year to meet the demand for housing. In March 2021, data showed that the number of new homes being built each year had fallen 11% from 244,000 to 216,490. Last year, the Housing Minister Christopher Pincher, said: “SMEs have a key part to play by increasing their output, as the biggest home builders in our country will not meet the Government’s housebuilding target alone.” To achieve this SMEs need to be supported and enabled to thrive, which has not been the case over the past three decades. In 1988, SME housebuilders brought forward 39% of new homes yet by 2020 this had dropped to 10%. This significant drop translates to a loss of at least 64,000 homes per year from SMEs with an annual gross development value (GDV) of £20 billion. 42 | NACFB

Research by Savills, commissioned by LDS Sales Guarantees, has shown there are plots for over 135,000 homes on SME-sized sites currently going undeveloped. If brought forward these homes would have a (GDV) in excess of £40 billion, representing six years of SME supply at current build rates. Two commonly stated barriers preventing SMEs from delivering new homes are the availability of land and the planning process. Interestingly – some would say controversially – the LDS research

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An optimal SME sector is around £12 billion of new debt each year. This would create approximately £120 million of broker fees

shows that there are sites with planning available, but SME housebuilders are unable to fulfil their potential because of a perceived lack of financial viability which, in turn, inhibits leverage and access to funding. LDS Sales Guarantees could transform viability by removing sales risk, opening up access to finance, and releasing 10% of the value to developers pre-construction. The research also found that a guarantee can reduce cash requirements by around 77%, trebling or quadrupling SME output. This means SMEs could bring forward 55,000 extra new homes, with a total development value of £24 billion, on an annual basis. LDS estimates that the funding requirement – and broker opportunity – of an optimal SME sector is around £12 billion of new debt each year. This would create approximately £120 million of broker fees, not to mention the additional introduction fees LDS pays brokers. As Lucy Greenwood, director of residential research and consultancy at Savills, said: “SME housebuilders have faced a number of challenges in recent decades, but there is positivity in the market. The potential is there for SMEs to increase their output if more can be done to help them deliver additional homes. Unblocking the financial barrier is a key step that will help enable this growth”.

Former Treasury Economist, Chris Walker, calculated that these 55,000 homes would support more than £12.9 billion in gross value added (GVA) per year, as well as supporting nearly 200,000 jobs in the construction industry. He states that LDS Sales Guarantees could help unblock the development finance barrier enabling SMEs to build thousands of extra new homes. Crucially, most of these would be net additional to the nation's housing supply creating much-needed new homes for people. In early 2021, LDS launched its unique online Sales Guarantee engine which allows brokers, lenders, and housebuilders to create an instant, bespoke guarantee using basic information only. In its first 12 months the engine produced over £1.9 billion of new proposals yet this is merely the tip of the iceberg of SME potential. Rosemary Davenport, spokesperson at Homes England, said of the new research: “Following the financial crash there was a huge decline in the number of SMEs operating in the market, with the industry becoming increasingly dependent on a small number of big housebuilders. Whilst these play an important role, they cannot construct the homes the country needs alone, and their dominant position can result in reduced customer choice and the slower build out of sites. “This report illustrates why we’re determined to remove the barriers SMEs face: freeing them up to get building and creating a more resilient and competitive market.” NACFB | 43

Industry Insight

Reasons to be cheerful The rise of Personal Guarantee Insurance Todd Davison Managing Director Purbeck Personal Guarantee Insurance

s we welcome the start of 2022, COVID-19 remains a disruptive threat, with a new variant to contend with. However, official numbers and our own experience offer commercial brokers reasons to be cheerful. In terms of the UK recovery, according to the October 2021 OBR Economic and Fiscal Outlook, GDP is expected to grow by 6.5% in 2021. This is a 2.4% increase on the OBR’s prediction in March 2021. From a business perspective, Purbeck Personal Guarantee Insurance saw its strongest trading month to date in October 2021 with a jump in demand for Personal Guarantee Insurance (PGI), most notably in the construction, professional services, and wholesaling sectors. The calibre of business owner and director applicants has also been strong. This could perhaps be a barometer of the credit risk appetite of lenders who are focusing on the strength of balance sheets and trading outlook when lending to businesses following the pandemic. This big uptick in business is also a sign of the strong broker relationships we have developed – indeed we have supported broker partners on £50 million of personal guarantees signed by their clients when raising business finance, since launch. Buoyed by this activity, Purbeck is planning a number of new products to support small businesses and brokers in 2022. This includes a direct-to-source PGI solution which involves partnering with lenders to provide them with their own PGI scheme for their customers as an additional layer of security. 44 | NACFB

On the downside, as we know, the strength of the rebound in demand in the UK has led to issues in the supply chain. These problems have been exacerbated by the changes in migration and trading regimes following Brexit. We have also seen energy prices soar, the collapse of yet another utility provider and shortages of labour in certain occupations. At the time of writing, the world is also facing a new risk in the form of the Omicron variant. Against this backdrop, we expect insolvency rates to continue to rise and at least return to the levels seen in 2019, following a 27% drop in 2020. In addition, those firms that replaced revenues with business interruption loans now have weakened balance sheets so many will be in scale-up mode to recover cashflow and rebuild their businesses. The Recovery Loan Scheme may have been extended from 31st December 2021 to 30th June 2022, but it is not attractive or indeed accessible to many businesses, so we expect uptake to remain muted as alternative credit solutions return to the market. All these factors considered, the environment for commercial lending looks better than it has been for some time and Personal Guarantee Insurance will continue to play a key part in making borrowing decisions by business owners easier.

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Personal Guarantee Insurance will continue to play a key part in making borrowing decisions by business owners easier

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Broker Voice

Circling the triangle Why we’re all in this together

Mark Jones Director Omega Group

e all need to do our bit. I am not necessarily referring to our wider personal contribution to society, supporting others around us, volunteering, or helping those who may be less fortunate, (I must admit I perhaps should do more in this respect myself), but to fulfilling our respective professional roles and tasks with which we are charged in helping clients to achieve their goals. As a broker, we strive to control and manage every element of the process from enquiry through to completion. However, if being truly honest, we must admit there are limitations to certain areas of the process we can significantly influence, let alone control. Whilst I always try to stay as close as I can to every element of every transaction, focusing on the minutia of legal agreements, valuation reports and to a greater level, lender criteria impacting specific terms available, there remain many aspects of the process where we must rely on those around us. The importance of working with trusted partners cannot be over-exaggerated and, as my first sentence suggests, to ensure a smooth and successful customer journey, we must all fulfil our respective parts of the process. The important phrase and associated mentality we instil in every member of the Omega team, is that of ‘adding value’. We shouldn’t simply obtain sanction and leave the lender, valuer, and solicitors to get on with it and hope for the best but take ownership of all areas of the transaction where possible, rather than simply acting as a gatekeeper, ensuring that we make the full respective processes as seamless as possible. The relationship between broker and lending partner is paramount, moreover, the relationships within the lending team itself are of vital importance. This includes between sales teams and credit, and even between the lender and their supporting funding lines where applicable. If we as brokers are discussing an enquiry with the sales team, they should be able to echo their respective risk team’s response and quote (within reason) suitable appetite and terms available. We shouldn’t have cases agreed at credit with all supporting documentation submitted only for funding lines to dismiss the specific application as not within their credit matrix or risk appetite. Of course, there are always exceptions and allowances, the very nature of the broker’s role can be to test boundaries within criteria and explore the grey areas to our clients’ benefit. Moreover, I truly believe it is our duty as brokers to work with lending partners to provide constructive feedback wherever possible. This doesn’t simply mean complain where errors have occurred, rather recognise successes, look for areas of improvement across all facets of

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The willingness to discuss perhaps a pre-completion condition or simply a valuer’s remark within a report can not only save time but exasperation for all parties

the process, assess risk appetite in comparison to the wider market, and ultimately remain conscious of the current and future working relationship in place. We need to look beyond just the relationship between the broker and lending partner. Whilst still maintaining independence, the broker can also sit between the lender and their acting solicitor – and even the valuer – positioning themselves as integral to any transaction. Without reciting myriad examples, we can all attest to frustration where communication lines aren’t apparently open or a seeming lack of clarity where perhaps more is required – that’s not to say that we don’t all make mistakes, but where they do occur, can usually be readily remedied if quickly identified or willingness shown to work collectively. In my experience, the willingness to discuss perhaps a pre-completion condition or simply a valuer’s remark within a report can not only save time but exasperation for all parties as such matters might be easily resolved or explained and save days if not weeks of written correspondence. The importance of teamwork within our own brokerages or organisations cannot be ignored; all striving to achieve the same goal and fulfilling the varied tasks inherent within the broker’s remit, whether that be compliance, ensuring honesty, transparency, and consistency of advice across a broker team, terms, and timing achievable and ultimately delivering best outcomes for our clients. Recognising the contribution of all individuals within the respective internal teams is as important as our external relationships. Build a strong team around you, not only within your own organisations, but through lending partners, solicitors, and valuers, allowing you to work as part of a team not a collection of individuals perhaps working to standard SLAs. The last two years have brought with them more than their fair number of challenges for us all; brokers, lenders, and all professionals within our sector, I truly believe that we need to collectively work harder than ever before to ensure we all fulfil our respective parts of the funding process. NACFB | 47

Opinion

Limiting factors Addressing limited company buy-to-let Ross Turrell Commercial Director CHL Mortgages

n recent times we’ve seen many landlords re-evaluate individual properties and portfolios in a bid to reduce costs, maximise yield and reconfigure their strategies going forward. This has resulted in an increasing number of landlords utilising limited company structures covering a variety of buy-to-let investment vehicles including HMOs, MUFBs, new build, ex-local authority, and commercial properties. In response to this growing demand, many new and existing lenders have repositioned their product ranges accordingly. For example, limited company buy-to-let lending has been central to the CHL Mortgages product range since our relaunch, and this is a lending type which will only continue to rise in prominence. A recent webinar poll conducted by CHL Mortgages, in conjunction with Knowledge Bank, showed that an overwhelming 96% of brokers expect to write more limited company business in 2022. Only 4% thought that they would write less. Many brokers have stepped up to this new challenge, educating themselves on the various additional considerations required by their landlord clients, but results from a further question in the poll suggest that more needs to be done. In response to a question around the challenges facing brokers when placing limited company business 59% of respondents cited a lack of knowledge around limited companies, 46% said structure and shareholding, 28% highlighted conveyancers, and 20% pointed to independent legal advice (for shareholders) as being a challenge. The last two pieces of data are interesting ones. The reality is that the legal process can be significantly different for limited company 48 | NACFB

deals meaning it is vital for borrowers to be able to source experienced, specialist legal support which can pinpoint any particular problems early in the process and deal with them accordingly. This can be limited by some lenders only offering access to a restricted legal panel, often leading to brokers and their clients missing out. As a lender, our aim is to promote transparency throughout our proposition and not restrict this legal choice as well as not adding margin to any fees, allowing the landlord clients to choose their own experts at a price they are happy with. In summary, the results of the poll underline the vast potential attached to this form of lending but also the requirement for additional support from pre-application right through to completion. Many specialist lenders take great responsibility in helping to inform intermediary partners on the available options and break down some of the complexities around limited companies, but this remains work in progress. And this is certainly an area which our growing BDM team will be looking to address in 2022.

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The legal process can be significantly different for limited company deals meaning it is vital for borrowers to be able to source experienced, specialist legal support

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Opinion

A levelling up Same same, but different Paresh Raja CEO Market Financial Solutions

multiple interest rate hikes in 2022. If interest rates rise, the cost of borrowing will increase. For property buyers, this raises questions around the suitability of different financial products, and how to find the best possible solution for their acquisition.

Demand for bridging loans

he arrival of the New Year invariably brings with it an element of crystal-ball-gazing. What will 2022 have in store – will the stories that dominated last year remain at the fore, or will the landscape significantly evolve?

The bridging industry has been a hive of activity throughout the pandemic. A recent survey of brokers found that 51% had seen a rise in demand for bridging finance from their clients during the pandemic, compared to a mere 3% who saw a decrease.

Such postulations may seem somewhat fanciful, but these are important questions for lenders to consider. Indeed, Market Financial Solutions (MFS) recently celebrated its 15th birthday, and we know very well that it is essential we remain ahead of the trends affecting the property and finance sectors. This is what we are watching out for.

Speed and flexibility have been important factors. Property buyers, especially investors, have often required specialist solutions to help them overcome issues like broken chains, another lender pulling out, or a complex set of circumstances behind their acquisition. Certainly, MFS has enjoyed one of the most successful periods in its 15-year history during the pandemic, with the volume of enquiries received and loans completed both reaching record highs. We expect another strong year in 2022, with the bridging sector gaining greater recognition among brokers and borrowers.

House price growth to slow, but not reverse ONS data showed that average UK house prices increased by 10.2% over the year to October 2021 – slightly down from the annual rate of 12.3% in September 2021. It is a pattern we are likely to see in the months to come, with a more sustainable rate of price growth compared to the past year. For context, Savills has forecast house price growth of 3.5% in 2022. Zoopla has suggested a rate of 3%, while Rightmove says 5%.

Interest rates to rise again Another safe prediction we can make is that interest rates will rise again. Inflation is expected to top 5% by next spring, while data suggests that employment rates are healthy even since the end of the furlough scheme. In December, the Bank of England moved to increase the base rate from 0.1% to 0.25% and many are forecasting 50 | NACFB

Interest in commercial property The final prediction I would make is that there will be increased interest among investors and businesses in commercial real estate. Our commercial lending operations were busy in 2021, with many clients seeking to takeover vacated buildings – for instance, we provided multiple loans for clients purchasing shopping centres. Other more creative investors are looking to empty office spaces and warehouses that can be converted to residential dwellings. Even with our core residential bridging loans and specialist buy-to-let products, MFS expects to serve clients across the semi-commercial and commercial markets throughout the year ahead.

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Listicle

New year, new resolve

he earliest record of making New Year’s resolutions dates back 4,000 years to the Babylonians who made them in order to get on the right side of the Gods. These days, though, making resolutions is less about satisfying deities and more about our desire to take steps towards positive change. And as there has been so much change in the workplace over the last two years, what better way to start the New Year than aligning some of our resolutions with our work life?

2. Take regular breaks Now that so many of us are working from home it’s very easy to roll out of bed and sit down at the workstation wearing pyjamas and find ourselves still sitting there at 6pm. Clearly, this is not good for mind or body. Whether you’re at home or in the office, try to take regular breaks from your computer. Get up. Walk around. Make some coffee. Take a lunch break. Every day. Oh, and get dressed!

Here are five suggestions, which we hope you’ll agree, are attainable and can make us feel good about ourselves.

1. Tidy your workstation Notes and paperwork dumped in random piles on your desk? Digital files all saved directly onto the desktop? Will you ever find anything ever again? Whether you’re in an office or working from home a messy workstation can be demotivating and overwhelming. A couple of hours spent clearing out and sorting through will help you to feel more in control of your workload. Thereafter, aim to set aside 10 minutes every Friday to help stay on top of it.

52 | NACFB

3. Show your face Virtual meetings are here to stay. And very useful they are too. But are you guilty of switching the camera off so that your colleagues can’t see you? If you’ve signed up to the first two resolutions, keeping the camera on during virtual meetings will be much easier. We might be communicating remotely but seeing each other’s faces should improve the experience and help to retain the personal touch.

4. Learn something new A change is as good as a rest according to the old adage, so why not set aside some time each week to learn something new? The NACFB’s learning portal can help. It contains lots of training modules, distilled into easily manageable, bite-sized chunks designed to support your development and understanding of the commercial finance industry as well as expanding your business knowledge. Some courses take as little as ten minutes to complete and all of them count towards your CPD requirement. What’s more the portal tracks the learning for you and it’s free for all Members to access. Simply login to your NACFB account.

5. Praise your colleagues It’s been a hard couple of years mentally. Reduced in-person contact with our peers can make it more difficult to gauge how colleagues might be coping. Remember to thank your work mates and praise them regularly for their help and support. A few kind words can go a long way.

Not going to bother? If like many of us, you don’t think it’s worth making any resolutions because it’s too difficult to keep them, why not seek support from your work colleagues? Ask them to take on the same resolutions so that you can cheer on each other. You could even come up with a fun reward system. And remember, go easy on yourself. Does it really matter if your good intentions slip from time to time? No one is perfect, just keep trying. We wish you a happy, successful, and resolute New Year.

CMY

Five Minutes With

ive F Minutes with: Stephen Parr Stephen Parr Midlands Relationship Manager Cambridge & Counties Bank Describe your role in ten words or less? Providing straightforward property lending solutions for brokers and direct customers.

How do you make a difference? I’m driven by relationships, and as such, being open and honest is key to a good working relationship and a happy customer. I also like to be flexible in that I can see solutions from all sides of the fence and collaborate in order to arrive at a successful conclusion.

In your view what are the key elements to a successful deal? Accuracy, honesty, and commitment from all parties involved. This includes the lender, broker, customer and business professionals. Everyone involved is working to the same end goal, which is completion, and the most successful deals are the ones where there is 100% commitment from everyone to achieve this. Furthermore, being upfront about any quirks in the deal from the start can ensure we get comfortable with the deal structure early rather than there being interruptions further down the line. 54 | NACFB

What’s the most common reason for turning away a deal? Lack of experience. We can only lend to experienced landlords and businesses, so sadly first-time landlords aren’t able to borrow from us.

If you were to start your own small business, what would it sell? I’d like to run a snooker club, focusing on introducing the game to younger people.

What is your favourite SME success story? Levi Roots and his Reggae Reggae Sauce. A great example of an individual believing in his plan and overcoming rejection.

What advice do you have for the modern commercial finance broker? Continue to build relationships as they are the driving force behind our industry. Getting to know who you are dealing with is key to

good business opportunities.

What is your favourite piece of management/leadership advice? Keep learning from every opportunity, and you never know when your paths may cross in future!

What has been your lockdown essential? Being close to a lot of open green spaces for walks, getting out in the fresh air and away from the work/home office!

What changes do you hope to see in the ‘new normal’? I’m a big fan of the continuation of table service and contactless deliveries.

Which person has inspired you the most? My parents who instilled good values from a young age and made sure I had everything I needed even when the going got tough.

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Commercial Broker (NACFB Magazine) January 2022

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