Commercial Broker (NACFB Magazine) - January/February 2024 by NACFB

Issue 116

Broker

JANUARY / FEBRUARY 2024

COMMERCIAL

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

14 THE DEVIL IN THE DETAIL A cautionary tale and the guard against onerous clauses

35 INTERVIEW: DAVE FURNIVAL A sit down with the man behind NatWest’s broker channel

Pathways to prosperity Putting UK businesses back on track

46 REDEFINING OPPORTUNITY Strategies for tackling the unmet funding needs of SMEs

57 THE GOING RATE? The factors in play with commercial mortgage pricing

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Contents

In this issue NACFB News

Industry Insight

4 6 8

10-11

Note from Norman Chambers Updates from the Association Note from headline sponsor, NatWest Industry news round-up

46-47 48-49 50 53-54

Reward Asset Finance: 100% deductible Responsible Finance: Redefining opportunity Shawbrook Bank: Rounding the circle Brickflow: All aboard Newmanor Law: Out of office?

14 Patron Profile 12-13

Further Information

Time Finance: A journey through Time

KIERAN JONES Editor & Feature Writer

33 Eastcheap | London | EC3M 1DT Kieran.Jones@nacfb.org.uk

Compliance Update 14-15

NACFB: The devil in the detail

Ask the Expert 16

London Belgravia Group: The hidden enemy

Special Features 19-33 35-37 38 40 42-43

NACFB: Pathways to prosperity The big interview: NatWest's Dave Furnival BVA BDRC: Actions and aspirations Paragon Bank: Controlling the controllable Asset Advantage: Second chances

NACFB 2024 Sponsors

Opinion & Commentary 56-57 58 60 62 64 66

Aria Finance: The going rate? Currencies Direct: Hedging your bets Federation of Small Businesses: Small business matters Bloomsmith: Back in the office Five ways the NACFB backed brokers in 2023 Five minutes with: Eshna Harper, Central Business Development Manager, Allica Bank

JENNY BARRETT Communications Consultant

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

33 Eastcheap | London | EC3M 1DT Laura.Mills@nacfb.org.uk MAGAZINE ADVERTISING T 02071 010359

Magazine@nacfb.org.uk MACKMAN Design & Production T 01787 388038

mackman.co.uk

Welcome

Norman’s Note W

elcome to this year’s first edition of the NACFB Commercial Broker magazine. As we step further into this year, itʼs important to reflect on our journey, the hurdles weʼve overcome, and the triumphs weʼve celebrated. Such reflection is best backed by the data from our 2023 membership surveys. And the results are in. In 2023, despite facing a myriad of challenges, from a confirmed recession to rising interest rates and the persistent cost of living crisis, the trade body’s Members demonstrated unwavering resilience and adaptability. They alone facilitated an impressive £38 billion in lending, a testament to collective strength and determination. Although this figure represents a decrease from the previous years, it mirrors the broader market trends, with SME lending experiencing something of a downturn - as confirmed by Bank of England data.

Norman Chambers Managing Director | NACFB

The challenges of 2023 were manifold, with 43% of commercial lenders reporting a decrease in total completions due to rising interest rates, and 50% of brokers observing the adverse effects of the cost-of-living crisis on SME creditworthiness. Alarmingly, 89% of surveyed brokers reported that inflation had caused either moderate or significant concern among their clients. Yet, amidst these challenges, our communityʼs capacity to support small businesses shone brightly. A striking figure from our survey reveals that a third of SMEs successfully funded by our Members had been turned down elsewhere, highlighting the critical role the Association’s intermediaries play in transforming potential rejections into opportunities. These formerly declined businesses contributed £13 billion in lending towards the total of broker-led transactions. As a reminder, and as we move forward, your Commercial Broker magazine will be a quarterly publication, with two issues available online only, ensuring we stay connected, informed, and inspired, no matter where we are. Our flagship publication is more than just a collection of articles; itʼs a reflection of our commitment to excellence, our shared challenges, and our collective successes. Hereʼs to a year of growth, learning, and success together.

4 | NACFB

Clear as day We like to keep things simple. That means clear pricing and transparent fees. Our broker business development managers are here to help better support you and your customers, making you aware of any charges from the get-go. That includes no early repayment charges (ERCs). Also, by joining our Broker Panel, you’ll get direct access to our Broker Portal, available 24/7.

Email brokerteam@natwest.com to join

NACFB News

Association updates for January / February 2024

NACFB celebrates double-digit membership growth UK’s biggest trade body for commercial finance broker reaches record new heights

he National Association of Commercial Finance Brokers (NACFB), the UK’s leading trade body for commercial finance intermediaries, has announced record-breaking growth in its membership for the year 2023. At the start of 2024, the Association boasted 2,436 individual brokers, marking an impressive 11% year-on-year increase.

and recognition of the NACFB. Currently, the Association has a very healthy pipeline of potential new commercial brokers and lenders, all keen to meet the stringent criteria to join the NACFB’s expanding community. In addition to these significant membership increases, the combined total of NACFB Patron lenders and Partner service providers remained stable at 166 organisations.

The substantial growth is further highlighted by the number of NACFB Member firms, which now stands at 1,168 – also registering an 11% year-on-year increase. Notably, of the 96 new independent broker firms that joined the NACFB, 63% primarily operate in the commercial property-led sectors. The remaining 37% cater to the diverse business borrowing needs in non-property areas, including leasing and asset finance.

Paul Goodman, NACFB Chair, shared his vision: “I extend my heartfelt thanks to everyone in our expanding network of finance professionals. Your efforts have been instrumental in our consistent growth. This surge allows the board and I to innovate and introduce new services for our Members, not only enhancing their business prospects but also elevating the stature of commercial intermediaries across the industry.”

In addition to the 96 independently authorised firms, a further 128 Appointed Representatives (ARs) of networks joined the NACFB in 2023 – of which a quarter (24%) operate in the leasing and asset space. The latter half of 2023 also saw a remarkable 250% surge in membership applications, demonstrating the growing appeal 6 | NACFB

Echoing this sentiment, Norman Chambers, NACFB managing director, highlighted the Association’s goals: “The NACFB embraces a wide spectrum of financial specialties, mirroring the varied needs of the UK’s business borrowers. We are steadfast in our mission to position our Members as modern day bank managers, a goal that is not merely aspirational but well within our reach, thanks to our collective efforts and dedication.”

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Note from our Sponsor

Predictions for 2024 Alongside easing lending conditions, what can we expect from the next 12 months?

Dave Furnival Head of Broker and Intermediary Services NatWest

t’s no understatement to say 2023 was a year of adaptation for businesses and brokers. While the prospect of higher interest rates may have brought forward investment decisions, the subdued economy did little for longer-term sentiment. Stubborn inflation has forced the Bank of England (BoE) to raise interest rates to greater heights than many expected, which in turn led to heightened volatility in the market, rising borrowing costs, and in some cases stalled investment plans.

But 2024 will be a year of further change, and some brokers may feel optimistic. What do we think will happen? Here are our three predictions:

Interest rates will fall, eventually NatWest economists predict that while the economy may slow, high inflation will force the BoE to keep interest rates higher for longer. However, we expect the BoE to reduce its base rate in August, cutting rates from 5.25% to 4.75%, and further reducing them again in November. Inflation appears to be a persistent problem for the UK relative to both the eurozone and the US. Businesses can therefore expect sterling to hold its value against these currencies as both the Federal Reserve and the European Central Bank cut their rates sooner in the year. 8 | NACFB

Businesses will have to contend with political uncertainty There are more than 40 elections planned for 2024, including in the US, Mexico, India, Taiwan, South Africa and most likely in the UK. While businesses may not operate in all of these geographies, many will have supply chains affected by political change. To what extent that change affects regulation, market access and exchange rates is uncertain but we know that businesses will keep an eye on ballot boxes. The good news is that the UK has enjoyed a resurgence in Foreign Direct Investment since the pandemic (ONS), supporting investments in UK infrastructure and adding some economic confidence. An election in the UK shouldn’t affect this.

Brokers can expect further innovation in the marketplace While brokers will have to contend with falling rates, they can expect further evolution of products from lenders. In recent years we at NatWest have adapted our terms to better support smaller loan amounts, have launched tech to help speed up the quotation process and have enhanced our broker portal. This has been done with the view of giving brokers a better array of products, giving them more targeted sector support and expertise – as well as making the process of seeking capital easier. We back this all up with the expertise of a national team available for face-to-face meetings, and believe our brokers appreciate how we develop what we offer. If you’re entering 2024 with a sense of optimism, you’re certainly not alone. Visit natwest.com/business/business-services/brokers.html to find out more.

FOR INTERMEDIARIES ONLY - Product and criteria information correct at time of print (11/01/2024)

02-09-01 (4)

Industry News

Industry News 1. FSB: Small businesses ‘finding it harder’ to access finance

3. FCA extends motor finance complaint response time

5. Stagnation in SME export growth finds BCC

The Federation of Small Businesses (FSB) reveals a tightening credit environment for SMEs, with only 53% of credit applications successful in Q4 2023, a decrease from 62% in the previous quarter. The FSB’s research also shows an increase in credit costs, with the average interest rate offered rising to 9.3% from 8.9% in Q3 2023. A significant 33% of successful applicants faced rates above 11%. The primary reason for seeking finance has shifted to cashflow concerns, representing 55% of applications, up from 26% in Q4 2022.

The Financial Conduct Authority (FCA) has announced changes to motor finance complaints handling due to their ongoing review of discretionary commission arrangements (DCAs) in the industry. Under the new rules, effective from 11th January, firms have a 37-week pause in the obligation to provide final responses to DCA complaints. Additionally, the time for consumers to refer DCA complaints to the Financial Ombudsman Service is extended from six to 15 months, conditional on firm compliance with the updated response timeframe.

The British Chambers of Commerce (BCC) Trade Confidence Outlook Q4 2023 highlights a concerning trend in SME exports. The survey, of over 2,000 UK SME exporters, revealed that 50% experienced no change in overseas sales, while 24% reported a decrease. Only 26% saw an increase in overseas sales, indicating a persistent underperformance in exports. SME manufacturers face more volatility compared to service exporters, with equal proportions (28%) reporting increases and decreases in exports. Service-oriented SMEs, particularly those in B2B, showed more stability.

4. Landlords to benefit from lower buy-to-let rates

Landlords with expiring mortgage deals will see a faster reduction in buy-to-let rates compared to owner-occupiers according to The Times. The average rate on a two-year buy-to-let loan dropped from 5.95% to 5.5% in January, resulting in lower monthly repayments. Many lenders have all recently cut rates including NatWest and Paragon Bank who have also reduced stress test rates, making it easier for landlords to remortgage or borrow more. The cheapest five-year fixes were available from 3.84% for standard property.

2. CBI: Private sector growth in UK remains weak The Confederation of British Industry’s (CBI) latest Growth Indicator reveals a continued downturn in UK private sector activity for the past 18 months. In the three months to January, a weighted balance of -11% was reported, a decline from -8% in the preceding quarter. Despite this, the next three months show signs of stability with a slight positive shift anticipated (+3%). Employment and price growth expectations in the services sector improved in January. Services and manufacturing are expected to grow, counterbalancing a further drop in distribution sales. 10 | NACFB

6. IESBA proposes code to combat greenwashing Firms that check environmental, social and governance claims made by companies will be asked to follow a proposed new ethics code to help combat greenwashing, the International Ethics Standards Board for Accountants (IESBA) has revealed. Companies will have to use new, mandatory disclosures, externally audited, on ESG and climate-related factors in their annual reports from 2024. The proposed standards, which will be open for public consultation until May, would complement the development of new technical assurance standards from the International Auditing and Assurance Standards Board.

7. Shop price inflation slows to weakest pace in two years

Shop price inflation in the UK has slowed to its weakest pace in nearly two years, according to the British Retail Consortium and NielsenIQ’s shop price index. The index dropped to 2.9% in the year to January, down from 4.3% the previous month. Food inflation also slowed to 6.1% in January, the lowest since June 2022, while price growth for non-food goods eased to 1.3%. However, rising shipping costs could keep inflation above the Bank of England’s 2% target.

8. Regulators urged to engage with influencers

9. Economy on path to recovery, says think-tank

10. UK undervalued companies at risk of foreign takeover

The CFA Institute has urged regulators to engage with so-called ‘finfluencers’ to make them aware of the rules around financial advice. In a report looking at how online financial influencers engage with Generation Z on investments, the Institute found that a lack of financial literacy, limited interaction with regulated financial advisers and a preference for online information drove would-be investors to influencers. Rhodri Preece, head of research, warned that finfluencers’ content “often lacks sufficient disclosures, which can hinder the ability of consumers to evaluate the objectivity of the information.”

The Centre for Economics and Business Research (CEBR) says that the UK economy likely experienced a mild recession in the second half of last year. However, the think-tank believes that the country is now on the path to recovery, thanks to higher disposable household income and increased spending indicating that the worst may well have passed. The Office for National Statistics recently revised down its estimates for thirdquarter GDP, indicating a 0.1% contraction, the first decline in 12 months.

City leaders are increasingly concerned about the threat of foreign takeovers due to the undervaluation of their companies. A majority of FTSE 350 board members surveyed by Deutsche Numis believe that their companies are at a greater risk of being acquired by overseas buyers in 2024. Last year, international buyers took advantage of cheap British stocks, resulting in a surge in takeover premiums. This has led to fears that British companies are undervalued, prompting businesses to seek higher valuations abroad.

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Patron Profile

A journey through time Chronicling a desire to lend well and prosper Ed Rimmer CEO Time Finance

A story behind every deal Each deal at Time Finance tells a story of its own. It begins with a spark – a local coffee shop looking to expand, a growing business on the brink of a breakthrough, a family business embracing a new generation, an entrepreneurial management team looking to acquire a new business.

ooking back on the journey of Time Finance and how far we’ve come, our story isn’t just about delivering finance solutions and reaching financial milestones; it’s about the relationships we’ve built, the challenges we’ve overcome, and the ways in which we’ve adapted to change. I believe ours is a journey that will resonate with both the brokers and SMEs we’ve had the privilege of working with.

We work hand-in-hand with our brokers and introducers to understand the nuances of each requirement and the narrative behind each business proposal. It’s these insights that weave into our solutions, ensuring that we provide more than just a funding solution and build the foundations for their future.

From humble beginnings

But we know that not every business story is about growth. Sometimes it’s simply about protecting cashflow, unlocking working capital to pay

Our journey began as a simple idea – to create a financial institution that resonated with the heartbeat of the business community. Time Finance was born out of a desire to be more than just a lender; we wanted to be a companion on the entrepreneurial journeys that our broker partners and SME clients set out on. We started out as a small team in Bath, under the 1pm plc brand, before setting out on an acquisition journey which saw us build our portfolio of asset finance, invoice finance, loans and asset based lending solutions. Our path was shaped by the stories of those we worked alongside and it’s these stories that inspired a growth journey of our own – to become the flexible and dependable, multi-product specialist that we are now. Today, with 140 colleagues in our team we support 11,000 businesses each year with over £175 million of funding. 12 | NACFB

“

We aim to act as a positive force in the industry and become a partner who grows alongside the businesses and brokers that we work with

“

Economic shifts, regulatory changes, and technological advancements are reshaping how lending is approached

overheads or fulfilling contracts. That’s why our solutions cover the basics, meaning each business is given the financial headroom when it needs it most, to keep operations moving smoothly.

Envisioning tomorrow Looking towards the future is key. It’s what helps to inspire innovation, invoke positive change, and keep up with the ever-changing lending landscape. Our roadmap for the future is clear. We believe that finance should be seamless, personal, and empowering. It includes harnessing technology to enhance our human-centric approach and having the right people on board to make that journey a success. It’s about becoming more than a lender; we aim to act as a positive force in the industry and become a partner who grows alongside the businesses and brokers that we work with.

Working towards the same goal Our people bring a unique blend of industry expertise and a zest for innovation. Despite our diverse backgrounds, we have a unified vision which remains instrumental in shaping our strategies. We’ve learned that when leadership encourages a culture of collaboration and continuous learning, great things happen. Last year, colleagues from every corner of the business helped to map out our new internal values: to put people first, to be bold,

to be flexible and to be genuine. We formed an internal compass to guide our decisions and reason for being. We set ourselves new goals to help us in our mission to become a nationally recognised funder and more than double our lending book, as we look to support more SMEs up and down the country.

Intermediary insights The future of lending is a collaborative one; we know too well that brokers and lenders create greater opportunities together. Our insights into the intermediary market have helped to bridge the gap between our approach to finance, the solutions we offer and, ultimately, the businesses we help finance. We’ve learned that the strength of this bridge lies in collaboration, trust, and relationships.

Our reflections The SME lending landscape remains at a crossroads with new challenges and opportunities. Economic shifts, regulatory changes, and technological advancements are reshaping how lending is approached, but the core remains the same – a need to understand and meet the needs of businesses. Time Finance’s journey is one of continuous adaptation and learning and as we move into 2024, this will be no different. We react and grow by listening – to our clients, our brokers, and the market. We remain dedicated to being a supportive, understanding, and innovative partner and build a team that shares this vision. NACFB | 13

Compliance

The devil in the detail A cautionary tale to guard against onerous clauses

Adam Matthews Compliance Officer NACFB

t is not often that comparisons can be drawn between the worlds of commercial finance brokers, musicians, and Hollywood actors, but there is one thing they all share in common; an ongoing frustration with onerous clauses. In an attempt to prevent artists re-recording their back catalogue, some major record labels have recently amended their artist contracts to retain exclusivity rights for longer. Whilst re-recording is not a new phenomenon, this is seen by many as a reaction to the commercial success artists can now achieve through social media platforms. Similarly, Hollywood actors’ recent strike action was in part a response to the proposed use of AI and ownership of a performer’s likeness. Initial movie studio proposals would have seen performers scanned and paid for one day’s work whilst the company owns their likeness in perpetuity and can use this in any future project without renewed consent or compensation. How does this relate to the life of a commercial finance broker? Whilst the day-to-day role is not all glitz and glamour, brokers also find themselves subject to contractual agreements and it is important that these are reviewed with a keen eye for detail. 14 | NACFB

A cautionary tale The NACFB recently sat down with a Member who wished to share their recent experience in the hope that others will not fall foul of an onerous lender clause. The Member in question has been trading for a number of years and some of their lender agreements dated back to when they first agreed to join the lender’s panel. At this time, the broker was keen to expand their funding options, and did not feel they were able to challenge any clauses within the agreement.

“

The broker was keen to expand their funding options, and did not feel they were able to challenge any clauses within the agreement

“

The lender explained that the agreement signed many years ago contained a clause whereby the broker agreed to indemnify the lender against any losses due to broker negligence.

Years later, the broker arranged finance for a client’s new car. They completed their due diligence, sourced the vehicle from an approved supplier, and satisfied all the lender’s requirements. What could possibly go wrong? Within weeks of the shiny vehicle being delivered, the client started to notice some faults with it. This did not worry the broker; the lender and supplier would surely resolve this, and the vehicle was still under warranty. Though this was initially the case, the lender and supplier eventually reached an impasse with the latter threatening legal action. To their surprise, the broker was then approached by the lender who sought to recoup their losses. The lender explained that the agreement signed many years ago contained a clause whereby the broker agreed to indemnify the lender against any losses due to broker negligence. The broker was surprised. There had been no reference to, or evidence of, negligence to this point. How was the broker expected to mitigate against a merchant quality issue? Should they perform a delivery inspection of each asset they finance? Should all employees be trained to spot common faults with high-end vehicles? Nevertheless, the broker cut their losses and agreed a settlement with the lender which saw them pay a five-figure sum and the arrival of two recovery trucks; one with the once prized car, and the other carrying the engine. The broker hopes they can recoup their losses not withstanding the stress, costs, and time it will take to make the vehicle sellable. The Member hopes this cautionary tale will shine a spotlight on

lender agreements and encourage the broking community to review new and legacy agreements with a careful eye, ensuring they are fair and reasonable.

Keeping the show on the road To ensure you do not fall foul of an onerous clause, there are some steps you can take as a business: • Keep a record of all your lender agreements and the date these were issued and signed. This will help you keep track of any changes or agreements which have been in place for a long time. • Perform a review of existing agreements and create a process that ensures any new agreements or addendums are reviewed. • Partner with a recognised NACFB Patron lender. The NACFB regularly reviews Patron agreements for onerous clauses, so you can be confident that the NACFB is supporting its Members, challenging for preferential terms. • Contact the NACFB compliance team if you would like advice on a specific clause. Whilst it may not be as exciting as the red carpet or music halls, these steps will help you to keep the show on the road. Should Members have any specific questions or require more detailed help, please contact the compliance team at compliance@nacfb.org.uk NACFB | 15

Ask the Expert

Latent defects: the hidden enemy

Q Giles Fallan Chief Executive London Belgravia Group

atent defects – damage resulting from a fault in the design or construction of a building following its completion – can be complex and expensive to rectify. We asked Giles Fallan of NACFB Partner London Belgravia Group to share his knowledge on the impact of latent defects and ask how brokers can ensure clients have the correct cover.

What are latent defects?

A latent defect is where damage has occurred to a building as a result of defective design, workmanship or materials, but is not discovered before the cover commences and after practical completion.

Where and when might latent defects be recognised?

Latent defects can emerge in foundations, roofing, or internal systems like plumbing and electrical work, posing safety risks. These defects can range from structural issues like weak foundations, walls, or roofs due to poor materials or inadequate support, to plumbing and electrical problems such as leaks or faulty wiring. Critical areas like roofing, insulation, and ventilation are also susceptible. Signs that may indicate the presence of latent defects include 16 | NACFB

cracking in walls or ceilings, uneven floors, excessive moisture or mould growth, and electrical or plumbing issues. Recognising these signs early is vital for property owners and can lead to more timely and cost-effective remediation.

Why do latent defects cause such a headache for developers?

Latent defects crop up long after project completion. Key issues include the high cost of repairs, particularly for critical structural or system defects, which escalate if defects cause further damage. Legal disputes over defect responsibility, involving contractors or designers, also lead to complex and costly legal proceedings. Latent defects can also harm a developerʼs reputation, as serious problems result in negative publicity and impact future business and brand reputation. Companies that previously encountered issues without latent defects insurance (LDI) cover may find it challenging to secure stakeholder investment and finance for future projects.

How can latent defects insurance help?

proof of fault. This insurance, transferable to future owners, enhances property value. As a “first party pay” policy, it directly compensates owners, speeding up restoration without legal liability concerns. Coverage extends to repair or rebuilding costs due to design, workmanship, or material defects, including severe structural issues.

Latent defects insurance, sometimes known as structural warranty or building warranty insurance, protects against the costs of repairing post-construction building defects, covering structural and waterproofing issues without needing

When should latent defects insurance be considered?

LDI should be a key consideration during the planning and construction phases, particularly for new builds, major extensions, and conversions. The optimal time to arrange LDI is prior to project commencement. Early arrangement allows for insurerʼs technical audits and design reviews, ensuring comprehensive coverage from the start. If arranged after construction begins, it can result in higher premiums and stricter terms. Funders, lenders, and tenants, especially those with full repairing leases, increasingly demand LDI at the pre-construction stage.

When might a broker introduce latent defects insurance to a client? Brokers are key in introducing latent defects insurance to clients, particularly during the purchase, development of new properties, or significant refurbishments. Their role is crucial in highlighting the benefits and necessity of LDI, which safeguards client investments.

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NACFB | 19

Pathways to prosperity PUTTING S MALL B US I N ESS ES B ACK ON TRAC K The narrative of a nation’s growth, aspirations, and challenges often finds metaphors in its most defining infrastructures. Last year, the NACFB told the story of its journey through 2022 by comparing the trade body’s vibrant network to the pulsing energy of the national grid. This year, our story draws parallels with the UK’s rail network, a testament to British innovation and its enduring importance. 2023 unfolded as a mosaic of economic challenges: fluctuating borrowing patterns, spiralling inflation, recurrent interest rate hikes, a looming recession, landmark regulatory developments, and an ever-present shadow of political uncertainty. Through it all, the UK’s small business community, with the unwavering support of both brokers and lenders, steered forward with determination. The extracts of the report that follow in this issue of Commercial Broker are your compass to understanding the year’s more intricate

terrains. It melds hard data with the sentiment, insights, and rich anecdotes that only the NACFB’s unique position in the financing ecosystem can provide. Just as Britain’s railways have been the arteries connecting our nation’s heartbeats, commercial finance brokers embody the spirit of connecting businesses to opportunities, illuminating pathways, and ensuring they stay on the right track. Much like our railways, the UK’s banking sector stands as a pioneering legacy. And in a year when rail networks consistently made headlines, be it due to pay disputes or the recalibration of HS2 plans, the NACFB community also faced its own set of challenges. Just as railway unions advocate for retaining the human touch in rail services, the NACFB continues to champion the indispensable role of human guidance in the SME funding journey. In the pages that follow – and within the full 40-page report - you’ll embark on a journey through the intermediary-led lending sector in 2023. May it enrich your understanding, reinforce your conviction, and remind you of the pivotal role the NACFB community plays in powering UK plc. Let’s embark on this journey together, and may our collective efforts keep businesses on the fast track to growth and prosperity.

N AC F B MEMB ERSHIP I N 2 0 2 3 AT A GL ANCE: MEMBER BROKER FIRMS

INDIVIDUAL MEMBER BROKERS

1 ,1 7 2

2,240

( 12%)

( 11%)

PATRON LENDERS

SERVICE PROVIDER PARTNERS

156

(=)

( 85%)

PAT H W AYS TO PRO S PE RITY

N ACFB ME MB E RS H IP RE PORT 2 0 2 4

The full 40-page report – featuring regional lending data and exclusive sectoral insights - has been shared with all NACFB Member brokers and Patron lenders. The document can also be downloaded for free at nacfb.org/advocacy

20 | NACFB

Other professional service firms (e.g. accountancies) (=)

SI Z E O F BRO KERAGES At present, approximately one-third of the NACFB’s Members operate as solo firms. 2023’s data closely resembles 2022’s findings, though rising operational costs and growing regulatory challenges could well lead to a continued decline in the number of these one-person firms.

1 broker ( 1%)

Non-regulated independent firm ( 3%)

73%

Directly authorised independent firm ( 9%)

4-7 13 - 20 35 - 59 brokers brokers brokers 2-3 60+ ( 1%) 8 - 12 ( 1%) 21 - 34 (=) brokers brokers brokers brokers ( 4%) ( 1%) ( 2%) ( 1%)

18%

Appointed representative of a network ( 7%)

Agent of a network ( 0.5%)

Digitally led platform ( 0.5%)

TYPE S OF B R OK E RAG E

34% 25% 19%

4% 11%

4% 1%

For only the second time, the NACFB surveyed its Members to determine how they themselves classify their firms. Whilst there has been a slight decrease in the number of solo firms, there hasn’t been a noticeable migration towards Appointed Representative (AR) networks. Instead, there’s been a significant (9%) increase in directly authorised independent firms. Notably, the number of non-regulated firms rose by a third, possibly as a reaction to the FCA’s ‘use it or lose it’ policy on authorisation, as anticipated in 2022.

B R O KER A R EAS OF BUSI NESS ACTIVITY The NACFB asked Members to project their total transaction value for 2023 and visualise it as a pie chart. They were then asked to specify the approximate percentage of each finance type within this total. This exercise aimed to identify the primary areas of business activity offered by confidently assuming the largest type of finance they provided by value was also their primary area of activity. Notably, 73% of the total transaction value generated

by NACFB Members originated from property-related sectors, with the remaining transactions being driven by various business finance-led activities. Given the increased costs due to the high-rate environment, it’s unsurprising that buy-to-let (BTL) mortgages were both refinanced and restructured in 2023. According to Bank of England data, in 2023, over 99% of new BTL loans had LTV ratios below 80% – with 82% of total BTL lending interest-only.

NACFB | 21

% of total transaction value

Anecdotally, there was an uptick in short-term and bridging finance, indicating a tendency among some borrowers to adopt a ‘wait and see’ stance in response to the fluctuating rate environment.

Buy-to-let mortgages

28% 25%

Commercial mortgages

Due to a methodological rethinking, the NACFB does not have viable comparable data from 2022. It’s important to note that this analysis, which focuses on the total transactional value by type of finance rather than volume, may disproportionately represent areas with lower ticket sizes but higher transaction volumes, as is likely with the leasing and asset sector.

16%

Leasing & asset finance Short-term & bridging finance

11%

Property development finance

Unsecured finance

7% 3%

Invoice finance M&A finance

29% DIVERSIFIED

66%

REFINED

STAYED BROADLY THE SAME

(reduced offering, scaled back services)

(offered more products and services)

Revenue-based finance

0.5%

Trade finance

0.5%

B US INE SS ACT IVITY F LUCT UAT IO N S Amidst the economic turbulence of 2023, NACFB Members demonstrated significant resilience and adaptability. A substantial 95% of brokerages either sustained their operational output or diversified their services. Only 5% scaled back their offerings in response to the challenging conditions.

(no change)

BUSI NESS SECTORS SERVICED Commercial brokers often define their expertise not just by the types of finance they offer, but also by specialising in specific business sectors, leveraging their industry knowledge and experience. In 2023, the NACFB surveyed its Members about the sectors they served. A significant 71%

of brokers shared that they facilitated transactions in the construction sector, followed by 65% in real estate, and 57% in manufacturing. Fewer brokers operated in sectors like public administration and defence (3%), mining and quarrying (8%), and utilities (8%).

% of Members who operated in sector in 2023

18%

12%

13%

15%

21%

23%

25%

26%

44%

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46%

54%

g urin fact

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ct stru

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57%

65%

71%

22 | NACFB

TYP ES O F LE NDER The NACFB asked lenders to classify their operations within specific lending categories. Despite debates over definitions, the results from the NACFB’s panel of lenders offer a representative snapshot of the wider commercial sector. For reference, the NACFB defines ‘specialist lenders’ as those providing non-conventional loans, and ‘challenger banks’ as smaller, newer banking institutions.

Community Development Financial Institutions (CDFIs) ( 6%)

High street banks ( 1%)

13%

Challenger banks ( 5%)

LE NDE R AR E AS OF B USINE SS ACT IVITY As with NACFB Members, the survey also asked Patron lenders to project their total transaction value for 2023 and visualise it as a pie chart. They too were then asked to specify the approximate percentage of each finance type within this total. This exercise aimed to identify the primary areas of business activity offered by confidently assuming the largest type of finance they provided by value was also their primary area of activity.

% of total transaction value 30%

Short-term & bridging finance Unsecured finance

22%

Commercial mortgages

19%

Property development finance

12%

Buy-to-let mortgages Leasing & asset finance

Specialist lenders ( 3%)

68%

P2P lenders ( 5%)

The data highlights a growth in the number of specialist lenders, potentially as a response to reduced market appetite. The NACFB observed a significant trend in 2023, with an increase in lenders – for the time being at least – sharpening their focus on specific regions, types of finance, and business groups. Additionally, there is a growing awareness and prevalence of CDFIs among brokers, as some lenders retreat from offering non-standard, smaller ticket-sized loans. 44% of the NACFB’s lender panel are regulated lenders, with 56% non-regulated, this data shows no change from 2022’s insights.

6% 5%

Revenue-based finance

Invoice finance

DIR E CT TO INT E R ME DIARY RAT IO The composition of NACFB Patrons includes both lenders who provide funds directly to SMEs as well as through intermediaries. Some lenders rely exclusively on brokers and introducers for their business, offering no direct lending options. In 2023, 69% of the total lending by NACFB Patrons to UK SMEs was conducted via the commercial intermediary channel. This proportion is consistent with the previous year’s figure of 70%, underscoring the enduring significance of the broker-led approach to the market. Whilst future shifts in this ratio remain uncertain, the fact that 56% of lenders expanded their broker-facing teams in 2023 suggests that this level of intermediary involvement is likely to persist.

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24 | NACFB

PR I MA RY R EASON FO R BO RR OWING

T H E INT E R ME DIARY DIF F E R E NC E Highlighting the value NACFB Members offer, in the past year, 32% of new clients successfully funded by Members had previously been denied funding elsewhere, marking a 3% increase from 2022. This includes businesses that were rejected for debt financing by banks or other finance types, such as equity funding. These cases exemplify the crucial role NACFB Members play in providing access to growth capital.

Building on a question introduced last year, the NACFB aims to distinguish between SME finance used for proactive growth and distressed borrowing. Brokers were asked to categorise their clients’ primary reason for seeking capital to help better identify key borrowing motivators. The survey showed that 87% of SME borrowing in 2023 was driven by growth ambitions, a slight decrease of five percentage points from 2022, whilst only 1% of loans were for reasons suggesting distress. Patron lenders also provided their insights on the growth-to-distressed borrowing ratio, with their responses largely corroborating the brokers’ data.

Additionally, the NACFB found that 29% of transactions brokered by Members led to clients choosing a different financial solution than they originally sought, a slight increase from the previous year. This shift underscores the tangible benefits of working with a commercial finance broker, who can guide clients towards more suitable funding options.

To prevent insolvency - 0% To help maintain daily operations

To directly save jobs - 1%

8 7 % G R OWT H For overseas trading import/export - 0%

12%

To help clients to innovate their products/services - 1%

DIST R E SS E D

12% 4%

1 2 % CONT INU I TY

To improve operational efficiency

15%

To expand the business

87%

67% To help acquire property/assets

It is important to note that since SMEs themselves were not directly surveyed, these results should be considered indicative rather than definitive. Despite this, the NACFB believes these findings are still valuable and informative.

NACFB | 25

F URT HER BORROWING FACTORS

LOAN DE FAULTS

In 2023, only 14% of NACFB Members’ successfully completed commercial finance transactions were regulated, showing a decline from 17% in 2022 and 16% in 2021. This decrease is notable given that the data also indicates that only 9% of broker firms classify themselves as non-regulated independent entities.

Economic downturns typically lead to an increase in payment defaults. In 2023, the NACFB for the first time asked its Member brokers if there was a higher rate of defaults compared to the previous year. Patron lenders were not surveyed on this due to the perceived sensitive nature of the information. The findings showed that whilst a quarter of brokers observed an increase in client defaults, the majority reported no significant change. The 31% of respondents who shared that they didn’t know may also include those reluctant to disclose such information.

In addition, NACFB Patrons shared that just 10% of their overall commercial transactions last year fell within the regulatory perimeter.

SUSTA I NABL E BORROWING Sustainable finance continued to be a hot topic in 2023. Whilst more lenders are offering green funding solutions, the question remains: is there a corresponding client demand? When asked, approximately a fifth of both NACFB Member brokers and Patron lenders reported a rise in the number of clients seeking green funding solutions, the largest proportion of both cohorts, however, saw no change.

More green funding enquiries

Less green funding enquiries

Broadly the same amount

Don’t know

31%

Increased significantly

24%

Increased slightly

19% 18% 32% 21% 50% 61%

Decreased significantly

Decreased slightly

37%

BROKER RESPONSE IN 2023 LENDER RESPONSE IN 2023 More fraudulent loan enquiries

F RAUD U LENT ACTIVITY The last UK recession was Q1 2020, at the height of the COVID-19 pandemic, and witnessed a 24% rise in fraud cases as per England and Wales crime figures. In the current economic downturn, a similar increase in fraud could be anticipated. Yet, when the NACFB surveyed its membership about fraudulent loan enquiries in 2023, a significant number of both lenders and brokers reported a decrease in such activity, with the majority observing no significant change.

Less fraudulent loan enquiries

Broadly the same amount

6% 12% 43% 18%

51% 70% BROKER RESPONSE IN 2023 LENDER RESPONSE IN 2023

Remained the same

Talk to us about commercial finance You have access to specialist support whenever you need it, providing clients with financial solutions, and you a mix of lifetime commissions and one-off payments. Call direct on 0345 901 3121 or email us at brokerdirect@lloydsbanking.com

All lending is subject to status. Calls may be monitored or recorded. Please note that any data sent via email is not secure and could be read by others.

NACFB | 27

TOTA L T RANSACTIONAL VALUE In 2023, NACFB Members facilitated an impressive £38 billion in lending, showcasing their resilience and adaptability in a challenging market. Although this represents an approximate 16% decrease from 2022’s £45 billion and a 7% drop from 2021’s £41 billion, this performance aligns with broader market trends. Bank of England data confirms that SME lending broadly decreased in the first three quarters of 2023, reflecting the overall economic climate.

£0 - £500k

10%

£500k - £1m

4% 18%

£1m - £5m

Despite these challenges, including rising inflation, more than a dozen successive interest rate rises, cautious lending policies, and a cost-of-living crisis, the NACFB community’s ability to generate £38 billion in lending is a testament to its commitment, adaptability, and effectiveness.

13%

£5m - £10m

10%

£10m - £15m

14%

£15m - £25m

The higher lending figures in previous years were also significantly boosted by pandemic-related funding. Looking ahead, the NACFB expects the value of broker-originated transactions to stabilise and plateau in the near term.

£25m - £50m

The majority of the NACFB’s broker Members originated a total of no more than £15 million in 2023, with 3% originating more than £500 million. The median average of the total value of transactions facilitated across all NACFB Member brokers in 2023 was £11,250,000.

11%

£50m - £100m

£100m - £500m

9% 3%

£500m+

AVERAG E SIZED LOANS IN 2023 In 2023, the average loan size successfully originated by NACFB Members across all finance types was £509,000. This represents a 10% decrease from the 2022 average of £563,000, which had previously marked a 23% increase from 2021’s average of £459,000.

15% 12%

5% 3% £0 - £5k

£5k - £15k

7% 1%

£15k - £30k

11%

5% 3%

£30k - £50k

£50k - £75k

£75k - £100k

£100k - £150k

£150k - £200k

£200k - £300k

£300k - £400k

£400k - £500k

£500k - £750k

£750k - £1m

£1m - £2m

£2m - £5m

0.5%

£5m - £10m

£10m - £20m

0.5%

£20m - £30m

28 | NACFB

AVERAG E SI ZED LOANS BY BRO KERAGE TY PE Regarding year-on-year comparisons, 37% of NACFB Member brokers reported higher average loan sizes in 2023 compared to 2022, whilst only 16% noted a decrease in the average deal size. Generally speaking, it would appear that average deal sizes are reverting to pre-pandemic levels across all finance types.

Average loan size data for the entire NACFB membership doesn't necessarily accurately reflect the diverse types of brokerages and their specific business activities. In 2023, 31% of asset and leasing brokers typically handled average transactions of approximately £69,000. In contrast, 28% of brokers focusing on commercial mortgages dealt with average loans ranging from £300,000 to £400,000 – with a mean average of £615,000 per transaction.

Type of finance

Average size of loan in 2019

Average size of loan in 2020

Average size of loan in 2021

Average size of loan in 2022

Average size of loan in 2023

Buy-to-Let finance

£356,000

£319,000

£364,000

£475,000

£305,000

Cashflow finance

£446,000

£445,000

Commercial mortgages

£519,000

£620,000

£569,000

£814,000

£615,000

Development finance

£1,571,000

£1,292,000

£1,138,000

£1,494,000

£1,800,000

Factoring & invoice finance

£372,000

£478,000

£6,956,000

£497,000

£774,000

Leasing & asset finance

£51,000

£130,000

£80,000

£81,000

£69,000

Short-term & bridging loans

£544,000

£480,000

£269,000

£625,000

£569,000

Unsecured finance

£140,000

£150,000

£128,000

£130,000

£240,000

M&A finance

£792,000

£677,000

£813,000

Trade finance

£188,000

Mean average across all finance types

£355,000

£391,000

£459,000

£563,000

£509,000

NACFB | 29

Average transaction size

Buy-to-let mortgages

Commercial mortgages

Invoice finance

Leasing & asset finance

M&A finance

Property development finance

Short-term & bridging finance

Trade finance

Unsecured finance

£0 - £5k

9.5%

1.2%

3.9%

£5k - £15k

4.8%

2.5%

7.1%

5.9%

5.3%

14.8%

4.2%

£15k - £30k

1.2%

5.9%

£30k - £50k

31.4%

3.7%

12.5%

£50k - £75k

2.4%

1.2%

7.1%

17.6%

16.7%

£75k - £100k

2.4%

1.2%

7.1%

19.6%

3.7%

8.3%

£100k - £150k

2.4%

3.7%

11.8%

50%

3.7%

50%

20.8%

£150k - £200k

7.1%

7.4%

7.1%

7.4%

8.3%

£200k - £300k

28.6%

11.1%

14.3%

10.5%

14.8%

50%

4.2%

£300k - £400k

16.7%

28.4%

21.4%

5.3%

11.1%

8.3%

£400k - £500k

16.7%

14.8%

7.1%

21.1%

14.8%

8.3%

£500k - £750k

7.1%

8.6%

7.1%

5.3%

7.4%

£750k - £1m

8.6%

7.1%

21.1%

11.1%

4.2%

£1m - £2m

2.4%

6.2%

50%

15.8%

4.2%

£2m - £5m

2.5%

14.3%

10.5%

7.4%

£5m - £10m

1.2%

£10m - £20m

5.3%

Median average size of transaction

£305,000

£615,000

£774,000

£69,000

£813,000

£1,800,000

£569,000

£188,000

£240,000

NUMBER OF T RA N SACTIONS

50 - 99 ( 4%) 20 - 49 ( 2%)

5-9 ( 4%)

Both for brokers and lenders, the number of transactions can be equally as telling as their value. Within the NACFB, some Members focus on fewer, higher-value transactions, while others rely on a higher volume of smaller deals. In 2023, 62% of NACFB Members completed 100 or fewer transactions, a slight decrease from 65% in 2022. While this isn’t a drastic change, it aligns with broker observations of a lower transaction count in 2023.

10 - 19 (=)

1-4 ( 3%)

21% 12% 7% 3%

150 - 249 ( 2%) 100 - 149 ( 3%)

500 - 999 ( 3%)

250 - 499 ( 3%)

2,000 - 3,499 ( 1%)

1,000 - 1,999 ( 2%)

3,500+ ( 1%)

19% 9%

9% 4%

2% 1%

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NACFB | 31

T HE TYP ES OF L ENDER SEL ECTED In a question returning for a second year, the NACFB aimed to understand the transactional distribution across different lender types, specifically identifying the most common lenders used by intermediaries for successful business loan placements in 2023.

P2P lenders ( 1%) Own book ( 4%)

0.5%

CDFIs ( 0.5%)

4% 7%

Other (=)

The starkest observation was a nearly 18% decrease in transactions completed through challenger banks, despite them holding the largest market share. This aligns with brokers’ observations of a strong 2022 for challenger banks followed by a perceptible tightening of criteria in 2023. Notably, there was a significant increase in transactions involving NACFB Members who provide ‘own book’ lending, now accounting for about 7% of all successful deals. The survey also uncovered that a significant 93% of NACFB Members successfully facilitated transactions through challenger banks at some point in 2023. Furthermore, more than a quarter (26%) of Members placed at least one loan with a Community Development Financial Institution (CDFI), despite these representing less than 1% of the total transactional value.

Specialist lenders ( 4%)

31%

Challenger banks ( 18%)

29%

High street banks ( 5%)

25%

Bank Referral Scheme (BRS) ( 3%)

10%

Refer to another lender ( 2%)

LEN D ER R E FERRAL ACTIVITY In situations where an intermediary-led transaction is declined, brokers often have multiple alternative funding sources to offer SMEs, highlighting the advantages of using commercial finance brokers. But what about small businesses that approach lenders directly and face rejection? The NACFB sought to understand the follow-up process for these enterprises from Patron lenders.

No direct applications ( 4%)

Surprisingly, 35% of commercial lenders surveyed admitted they lack a formal referral system for direct enquiries that are declined, though this is a 5% improvement from last year. Still, this leaves a considerable number of UK businesses without guidance on where to turn after a funding denial. The NACFB aims to bridge this gap, believing that many of these rejected applications could find success with the aid of an NACFB Member.

No referrals ( 5%)

Notably, the proportion of lenders who refer declined SME clients to commercial brokers or alternative financing options, like equity funding, has decreased in 2023 compared to the previous year.

Signpost to government-backed schemes ( 1%)

16%

35%

26%

Refer to a broker ( 4%)

Refer to alternative financing (equity etc) ( 2%)

Signpost to grant funding ( 4%)

32 | NACFB

LEN D ER A PPETITES TO L END Lender appetites are ever-changing, and over the past five years, brokers have navigated their fluctuating nature and the impact on businesses in various sectors and regions. For commercial brokers and their SME clients, these shifts in lending appetite often crucially influence access to capital and growth opportunities. In 2023, over half of NACFB Members observed a decrease in lending appetites across all lender types, whilst only 14% noted any noticeable increase.

Broker perceptions of lender appetites in 2023

In 2023, when NACFB Patron lenders were directly asked to evaluate their own willingness to lend to small businesses through intermediaries, half reported their lending levels were moderately or significantly higher than in 2022. Only 12% of these commercial lenders indicated any reduction in their lending appetite during the year.

Lendersʼ views on their own appetites to lend Significantly higher than it has been previously

16%

Moderately higher than previously

34% 38%

Neutral

14%

52%

35%

INCREASED

DECREASED

STAYED BROADLY THE SAME

Moderately lower than previously

11%

Significantly lower than it has been previously

How brokers adapted to reduced lender appetites

Commercial finance brokers, particularly NACFB Members, are well-versed in resilience and adaptability, often adjusting to changing lender appetites and external factors. Among those who noticed a reduction in lending appetite, nearly half responded by seeking alternative lenders, demonstrating their resourcefulness. Notably, only 5% reported a decrease in their overall lending volume as a result of these shifts.

Sought alternative lenders

48%

No perceived reduction in lending appetites Diversified services

33% 7%

Broadened client base

Reduced lending volume

Other

Changes in lending appetite are both standard and prudent in the finance industry; it's unrealistic to expect the 'funding tap' to always be on. Encouragingly, this year's survey data reveals effective communication from lenders regarding policy and appetite changes. In 2023, 55% of NACFB Members reported that lenders were effective or very effective in communicating these changes to their broker panels.

NACFB | 33

The NACFB surveyed Members to understand how their attitudes towards high-street lenders changed in 2023, if at all. Amid anecdotal evidence of high-street banks adopting tighter lending criteria and a more conservative approach to loan management, about half (48%) of NACFB Members reported no change in their relationship with these banks, whilst a quarter indicated some form of deterioration in relations.

Movement to alternative lenders?

Moderate shift away

Strong shift away

24%

Strong shift towards

Broker relationships with high street lenders

Improved significantly Improved slightly

8% 14%

Remained the same Worsened slightly Worsened significantly No answer

48% 18% No shift

Ineffective

12%

10%

Very effective

N ACFB ME MB E RS H IP RE PORT 2 0 2 4

32%

Moderate shift towards

In 2022, 70% of transactions by NACFB Members were placed with either specialist lenders or challenger banks. Looking ahead, the NACFB surveyed intermediaries about their expectations for a continued shift towards the use of alternative lenders in 2024. Nearly three-quarters (72%) of respondents anticipate either a moderate or significant increase in the use of alternative lenders in the coming year.

PAT H W AYS TO PRO S PE RITY

Neutral

48%

According to brokers, how effectively did lenders communicate changes in appetite

Very ineffective

20%

45%

Effective

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Your go-to lender for PROperty finance FOR INTERMEDIARIES ONLY

The Big Interview

Embracing all opportunities A conversation with NatWestʼs Dave Furnival

t’s a chilly Thursday afternoon in late November, the atmosphere inside a small, dry, airless conference room in Westminster’s Park Plaza is a stark contrast to the blustery wintery weather outside. In a few hours’ time, the NACFB’s Commercial Lender Awards would be in full swing, and it was here, in this modest setting, that we sat down with one of the intermediary-led lending sector’s most recognisable faces: Dave Furnival, NatWest’s head of broker and intermediary services. Dressed sharply, and with a suit bag over his shoulder Furnival enters the room with a wide grin. His reputation as one of the UK’s leading minds in intermediary-led lending precedes him. Known for his deep understanding of the market dynamics and a knack for backing his statements with solid data, he’s a formidable yet respected industry figure. His work has not only enhanced NatWest’s broker proposition but also brought a fresh perspective to the often-misunderstood role of high street banks in the post-pandemic lending era. Furnival’s own journey with the NACFB is a testament to his commitment and influence. Having served as the first-ever lender Patron on the Association’s board, he now gears up for 2024, where he and his team take on the role of the NACFB’s headline sponsor. “It’s a thrilling development,” he reflects on the partnership. “It underscores our commitment to brokers and acknowledges the importance of collaborating with their leading trade association.”

Q: Thanks for making the time for us Dave, how’s 2023 been for you and the team? Dave Furnival (DF): 2023 has been, in one word, hectic! The flow of business we receive from our brokers has continued to rise, and the variety has been quite staggering. This, coupled with our constant desire to challenge ourselves on how we do more to support both our brokers

and SMEs more broadly, ensures the agenda is always full. The team are also in great shape, highly energised with an ambition to support brokers, small and large with a dedicated and personalised service.

Q: Dave, we should really say congratulations on the headline sponsorship with the NACFB. What does this mean for NatWest and the broker market? DF: Thank you. This sponsorship is a big step for us. It represents our long-term commitment to the broker market and is a timely partnership. It’s about acknowledging the growth and importance of brokers and enhancing our collaboration with their leading trade association.

Q: NatWest recently launched the Opportunities Fund. Can you tell us more about this initiative? DF: Absolutely. The Opportunities Fund is our response to the evolving economic landscape. It’s designed to support UK businesses, especially in these challenging times of rising interest rates and cost-of-living crises. We’ve increased the fund’s flexibility and debt-service capacity to help businesses on the margins of our normal serviceability tests. This move is about supporting businesses’ growth plans, whether their focus is on purchasing property, recruitment, or improving supply chains.

Q: How has NatWest adapted its relationship with brokers in an era of post-pandemic lending? DF: I wouldn’t say we have adapted, more evolved. Throughout the pandemic, as we know, most communication was by phone or over Zoom. Coming through the other side of this I am keen we establish genuine and deep-seated relationships with our brokers. I believe only by fostering the true spirit of partnership can we be mutually successful, and importantly help businesses across the UK to thrive and succeed. NACFB | 35

The Big Interview

Q: Speaking of the pandemic, the expansion of the Recovery Loan Scheme (RLS) seems like a significant step. How does this change the playing field for UK businesses? DF: The expanded RLS allows us to reach more customers and offer support in scenarios like goodwill in business acquisitions or start-up proposals. It includes using the RLS for term loans to refinance third-party debt. This expansion means that we can help businesses that previously faced restrictions due to existing debts. It’s about giving them a chance to thrive in the current fiscal conditions. We have seen a really strong response from our brokers with a significant upward shift in enquiries as a result of the changes. We are confident we will be able to help our brokers and their customers over coming weeks and months.

Q: You mentioned enhanced support for brokers. How does this translate into tangible benefits? DF: Our Broker Direct team is now equipped to handle a wider array of cases, offering dedicated support. This not only speeds up the agreement process but improves completion times. We’ve extended this service to cases up to £250,000, which means we can assist more businesses than ever. It’s about making the brokers’ job easier and more rewarding, understanding the crucial role they play in the lending ecosystem and recognising the basics of excellent service, though not at the expense of a genuine local relationship.

Q: With the increased procuration payment, it seems NatWest is recognising the vital role of brokers in a new way. DF: Yes, I believe we are. We’ve raised the procuration payment to 1%, a significant increase from the previous rate. This highlights the value we place on the role of brokers in supporting customers and reflects our commitment to making their work as impactful and rewarding as possible. It also recognises the role they play in supporting businesses through the application process, which for many businesses can be daunting.

Q: What are the biggest challenges currently facing the broker and intermediary services sector, and how is NatWest positioned to address these? DF: I think 2024 will see us continue to face a number of quite significant challenges, which will impact economies and sentiment worldwide. Sadly, we continue to see wars in the Middle East and Ukraine, with possibility for these conflicts to spread. We continue to face significant market uncertainty with the world facing over 50 elections in 2024 where we will see over 2 billion people go to the polls. How these shake through and impact government policy, sentiment, and trade throughout the world will be interesting to see. 36 | NACFB

Additionally, there remains much debate about the path of interest rates, with the cost-of-living impact and inflation still feeding through into the trading operations of many businesses and their ability to look to 2024 to thrive or survive. We are also yet to see the full impact of the change in residential mortgage rates fully hit the UK economy and consumer spending and we expect this will impact many businesses through 2024. Here at NatWest, I believe we are well placed to support our brokers. We have extensive experience, built on deep rooted economic insight and the ability to develop this into wider support for both businesses and our brokers. We have broad and deep sector experience and can provide pragmatic advice which is built on developing relationships for the long term. These relationships we recognise are crucial to guiding brokers through the challenges which we face year on year. The wider NatWest team and I are here to help.

Q: As a leader, what philosophy do you follow in steering your team? DF: I believe in constantly striving for excellence powered by ambition and a belief in empowerment that we can always overachieve and grow. This is underpinned by an insurgent mindset and believing in the art of the possible and the steps we can all take to continue on that front. I encourage our team to be bold and not afraid to fail.

Q: And finally, before you go, what’s your vision for the future of NatWest in this sector? DF: Our goal is clear, we want to succeed alongside our brokers and their customers and we believe the initiatives we have launched are a firm commitment towards this goal. We will continue to support and innovate within the broker network, as they are vital to our business. Quite simply our driving ethos has been, is currently, and will continue to be about creating opportunities and achieving success together.

We wrap our conversation with Dave dashing to another meeting before donning his glad rags and hosting his table at the NACFB Commercial Lender Awards, where his team would go on to be recognised as 2023’s Commercial Mortgage Lender of the Year as well as being highly commended in three other categories, including Business Bank of the Year. It’s hard to spend any time in Dave’s company and not find his passion and clarity of vision for the future of intermediary-led lending infectious. He is embracing an approach that is not only focused on enhancing NatWest’s services but about fostering a more collaborative and supportive ecosystem where brokers, businesses, and banks can thrive together. In such a rapidly changing economic landscape, both Furnival and NatWest seem poised to lead the way.

NACFB | 37

Special Feature

Actions and aspirations Current financing behaviour and sentiment among SMEs Shiona Davies Director BVA BDRC

s 2024 unfolds, how are SMEs feeling after all the recent upheavals of the pandemic, inflation and high interest rates? Since 2011, the SME Finance Monitor has been reporting on sentiment and behaviour amongst this key economic group and after the seismic events of 2020 and 2021, followed by an improvement in 2022 across a range of key metrics, 2023 typically saw these gains maintained but not necessarily built upon. Ahead of publication of the full 2024 report in March, I’ve listed here some of the key themes we have seen in 2023 to give brokers an understanding of the actions and aspirations of UK SMEs and where we see the market heading. Three in 10 SMEs have grown and this proportion has changed little since Q2 2022, remaining below the typical pre-pandemic position where four in 10 had grown, primarily due to lower growth amongst the zero and 1-9 employee SMEs. Growth aspirations meanwhile recovered in 2023 to pre-pandemic levels with just under half planning to grow. Four in 10 SMEs have been significantly impacted by increasing costs (amongst three quarters reporting any impact), with limited variation by size of SME, but with more of an impact in the hospitality, transport and agriculture sectors. Looking forward, the two key future barriers, each cited by one in three SMEs, are increasing costs and the economic climate, with concern for the latter almost back to pandemic levels. Meanwhile, one in five employers are worried about recruiting and retaining staff, twice the level seen pre-pandemic. An increase in the use of any external finance, up from four in 10 at the start of the year to five in 10 by the end, was due to increased use of ‘core’ finance, notably credit cards. Around one in five SMEs were still 38 | NACFB

repaying pandemic related funding and overall, one in four of those using any finance were borrowing more than they were pre-pandemic. After increasing markedly during the pandemic on the back of government funding, applications for new or renewed finance, have since declined, with around one in 10 reporting a borrowing event. Application success rates were similarly affected by the availability of pandemic funding, with almost nine in 10 applications successful at that time. Currently the success rate is around five in 10, with the change seen almost exclusively for smaller, younger applicants who may not have borrowed before. Success rates amongst those with 10-249 employees have seen much less of a change. Overall, one in five SMEs (notably those with no or 1-9 employees and the hospitality sector) described themselves as ‘struggling’, with revenue not matching expenditure and limited means of bridging that gap with savings or investments. But to finish on a more positive note, almost twice as many, one in three, felt they were ‘well off’ or ‘comfortable’. The full SME Finance Monitor report for 2023 will be available in March.

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An increase in the use of any external finance, up from four in 10 at the start of the year to five in 10 by the end, was due to increased use of ‘core’ finance, notably credit cards

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Special Feature

Controlling the controllable Supporting property developers to reduce delays Neal Moy Managing Director of Development Finance Paragon Bank

t remains apparent that there are challenges facing the construction industry, which could cause delays to or even halt projects. This can be seen in the increase in labour costs and supply shortages that were evident last year, resulting in prolonged periods needed on sites and higher costs. As well as the imminent general election, which could result in further changes, and uncertainties around achieving new planning consents, with issues such as nutrient and phosphate neutrality affecting certain areas of the country, fewer schemes are being progressed. However, lenders and brokers can work with developers to reduce the risk of delayed or unfinished construction projects and support them throughout the process. As a broker or lender, communication and establishing a good relationship with the developer is key. Developers should be made to feel comfortable reaching out for support and guidance if they need it and projects should be seen as a joint venture, with the lender or broker there to support their client and make them aware that help is available, if needed. Strong communication then needs to be maintained throughout the project. Whilst it is vital to discuss the proposed plans initially, highlighting risks, as well as discussing things such as any contingencies built into the budgets, it is also key to continue checking in with them regularly thereafter. This will help to mitigate risks associated with any prolongation of the works and any increases in costs that need to be managed by the parties. 40 | NACFB

A fully transparent borrower is vital to the success of the funding provided by the lender as primarily both parties want to ensure that the works are completed. Open lines of communication and regular meetings on site are crucial so that if a developer encounters any issues that could delay the project, they should feel more comfortable speaking to their lender or broker straight away. They will then be able to discuss and resolve any problems to avoid unnecessary delays, which would undoubtedly add to their costs. Lenders and brokers have many ways that they’re able to support clients and this should be communicated to them throughout the process. For instance, to find a suitable solution to a potential problem, they may have the ability to adjust the terms of the agreement such as length of facility or the loan amount. Or they may have a specialist team they are able to put them in touch with or recommend, who can provide guidance on a particular problem, to ensure that this is resolved. Whilst the current economic climate may pose some challenges for developers, it is important to look for solutions to these problems and as a lender or broker, continually provide support to developers throughout the process.

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Special Feature

Second chances The risks associated with secondary security Philip Knight Credit & Risk Director Asset Advantage

3. The borrower cannot easily dispose of their home (although not impossible) so as to save it from being called in as part of the personal guarantee. 4. Having a home makes it easier to locate the borrower/guarantor.

ecurity performs two quite distinct purposes. At its most basic level, it gives the lender a secondary recourse beyond the borrower’s credit covenant. Equally important, in my view, is how it drives customer behaviour. The taking of security is not just about putting in place a fallback should the borrower default, it’s about encouraging the borrower not to default. Further, a skilfully deployed security package can minimise the opportunity for the more unscrupulous borrower to avoid their obligations. Let’s take the humble personal guarantee as an example. Whilst the failure of a business is clearly impactful on shareholders and creditors, the pain is considerably greater for the borrower who has personal assets on the line. It doesn’t take much imagination to appreciate how much harder a borrower might work to save their business if their home is at risk. A personal guarantee that includes the guarantor’s home provides a lender with several layers of comfort: 1. The borrower has gone through and passed the mortgage lender’s due diligence and affordability process. 2. The borrower’s asset can be ascribed a definitive value, i.e. the equity in the home. 42 | NACFB

Property charges are obviously the meat and drink of specialist property lenders. They can also be useful in supporting personal guarantees, or where a business has a property asset, ensuring that the personal net worth statement used to support the personal guarantee remains relevant. Without such a charge the property can be sold and the cash squirrelled away or the guarantor’s ownership switched to their partner. However, it is important to acknowledge that this type of security

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Security comes with many pitfalls and it’s not for nothing that many underwriters state that security does not turn a bad deal into a good one, and this can be hard for brokers and their clients to understand

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The collection of debts is becoming increasingly prone to litigation, so it is vitally important to minimise the reliance on security and emphasise the importance of the credit risk underwriting

is complex and expensive to take. Moreover, should enforcement be required it can be a lengthy and expensive process to realise.

set protocols that need to be followed which leaves open even more opportunities for inadvertent errors.

Company guarantees are useful for tying in trading entities – which are generating the profits – to, say, the holding company that is borrowing the money. In addition, they can minimise the risk of the business moving assets within the group and making the borrower worthless as a credit covenant.

If the security requires litigation to enforce, then a whole new class of jeopardy raises its ugly – and expensive – head. Indeed, for smaller debts it might not even be cost effective to go to court to enforce security or seek a bankruptcy. Legal action, however good a lender’s case might be, is a minefield of risk with high upfront costs, investment of time and with no guarantee of success. Even if the lender does win and is awarded costs – something which does not always happen – then obviously, the equity available to clear the debt is reduced by the legal bills. In my experience at least, the collection of debts is becoming increasingly prone to litigation, so it is vitally important to minimise the reliance on security and emphasise the importance of the credit risk underwriting.

Debentures (fixed and floating charges) are a piece of security which banks have traditionally taken for even the smallest overdraft. They are increasingly being sought by non-bank lenders and are useful in flagging to other lenders their involvement with a business, and as a tool to manage an insolvency situation. Security comes with many pitfalls and it’s not for nothing that many underwriters state that security does not turn a bad deal into a good one, and this can be hard for brokers and their clients to understand. Operational risk is ever present; even the best documentation teams and systems can make mistakes thus invalidating them as pieces of security. Mistakes can be made in executing the documents and you can guarantee (pun not intended) that the one document you need to rely on was signed and dated in the wrong place. Whilst the rules around enforcing security for non-regulated transactions are far less onerous than on regulated deals, nevertheless, there are

I’ll close by saying I am not a lawyer, and this article is not a legal ‘how to’. My experience is one gained largely from working on non-regulated finance taken as a top-up for regular asset finance or loan deals rather than on property finance deals. I hope that brokers reading this can use this article as a guide to identifying the potential risks associated with secondary security from the lender’s perspective. Ultimately, this knowledge should help brokers to manage both clients’ understanding of underwriting risk and their expectations for a successful outcome. NACFB | 43

Industry Insight

100% deductible How full expensing will accelerate asset finance sector growth Robert Still Managing Director Reward Asset Finance

latest government initiative. Confidence amongst a lot of businesses is still very low and there remains several major barriers – other than tax – for those looking to achieve growth in the year ahead. In order for many companies to move forward and expand, there should be targeted measures that address their needs at each stage of the business lifecycle.

ith the UK economy continuing to present challenging operating conditions at the point when the government’s super-deduction scheme ended in March last year, it was no surprise that the Chancellor’s Autumn Statement made full expensing permanent for businesses investing in new IT equipment, plant and machinery. It’s a real boost for SMEs as they are now able to deduct the full cost of assets like machinery from their taxable income.

Whilst this tax relief will help some, there are many British companies whose main concern is just trying to survive and keep going, and not investing in new CapEx (capital expenditure) projects. For these businesses, the concern around the ease and speed of borrowing money continues to be a significant growth barrier, with many lenders’ credit appetites diminishing in the challenging economic climate. This is all at a time when traditional high street banks are less likely to lend and additional working capital is needed most.

The benefits of full expensing are twofold. Firstly, it enhances cashflow for businesses, as the immediate deduction reduces their tax liability. Secondly, the policy serves as a catalyst for increased working capital to finance future expansion, innovate or tackle some of the day-to-day operational challenges many firms still face.

This should not overshadow the many benefits full expensing will bring. It will provide a terrific boost for SMEs operating across a range of sectors and present an opportunity for growth that shouldn’t be underestimated in this period of instability. The emphasis is now on brokers and asset finance lenders to guide clients on how to capitalise from it and rebuild confidence after a challenging 2023.

With asset finance integral to facilitating full expensing, brokers are going to play a key role in helping their clients maximise the opportunity and acquire the type of assets that can propel their business forward. We envisage it will help a wide range of sectors, given that it will provide tax relief on commercial vehicles and warehousing equipment such as forklift trucks through to IT equipment and excavators used in construction. It does need highlighting that super-deduction was a response to the pandemic and allowed companies to deduct 130% of the cost of capital purchases in the year they occurred and in one go. Full expensing works the same, but it is limited to 100% of the cost of the purchased assets, so some SMEs need to factor this in when planning ahead and forecasting how they aim to capitalise on this 44 | NACFB

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Industry Insight

Redefining opportunity Tackling the unmet funding needs of SMEs Theodora Hadjimichael Chief Executive Responsible Finance

herever they live, entrepreneurs need the right kind of finance at the right time to develop their businesses. Yet many smaller businesses lack the track record, credit history, or collateral required by mainstream lenders. Four groups face particularly high barriers in accessing the business finance they need to grow: SMEs in places with higher rates of deprivation; SMEs with more complex needs but weaker relationships with banks; SMEs led by people from an ethnic minority background; SMEs led by women. The barriers are also acute for smaller businesses trying to borrow £100,000 or less as we know from the NACFB and other research. Yet hundreds of thousands of these businesses are fundable and could be creating economic and social value. Responsible Finance set out proposals to boost the availability of finance for fundable but under-served small businesses in our recent evidence to the Treasury Select Committee’s Inquiry on SME Finance. How big is this finance gap? Research published by the UK government indicates that around 700,000, or 15%, of all small businesses cite access to finance as a major barrier to growth. The same research shows that over 97% of small businesses with unmet finance needs 46 | NACFB

are seeking bank loans of less than £100,000. Drawing on data from BEIS Longitudinal Surveys, the SME Finance Monitor and the ONS, Responsible Finance research shows that around one third of those with unmet financing needs are fundable. Meanwhile lending from the UK’s Community Development Finance Institutions (CDFIs) is creating thriving businesses and banks’ future customers. Over the past five years CDFIs have lent over £1 billion to small enterprises across the UK, with the overwhelming majority having been previously declined by mainstream finance. 90% of CDFI borrowers go on to successfully repay their loans and grow their businesses, delivering additional economic growth, productivity gains and reducing inequalities. Over 90% of the businesses which borrowed from CDFIs last year had previously been declined by another lender; 93% were based

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700,000, or 15%, of all small businesses cite access to finance as a major barrier to growth

outside London with half based in the UK’s most disadvantaged areas – yet they have all had a ‘no’ turned into a ‘yes’ by a CDFI and most go on to thrive. Our CDFI members are not-for-profit organisations which provide finance to people and businesses who are either excluded or underserved by mainstream finance. They could lend more to these businesses either rejected or discouraged from applying for finance and reduce disparities in access to finance between regions and demographic groups.

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Many SMEs are informally declined by their bank, so they are never offered the option of a referral to another lender

Three key things would enable CDFIs to do so. We would love mainstream banks to partner with and invest into CDFIs more. We hold valuable relationships with many banks, but we’d love to see this happen at a much larger scale as it does in the US. Secondly, there are key measures Government can take to de-risk bank investment. Crucially, and urgently as I write this, we want Government to extend the Recovery Loan Scheme (RLS). RLS is a guarantee scheme which is very effective at unlocking finance for SMEs that lack adequate security (often women, ethnic minorities, those located in deprived areas and young people). RLS is also a crucial part of CDFIs’ business models and how they manage the risk of lending to underserved businesses. I will celebrate if RLS has been extended and this point is out of date when you read it. Finally, we need an effective referral scheme. Current referral systems are not effective in facilitating the flow of declined and discouraged borrowers to CDFIs. Many SMEs are informally declined by their bank, so they are never offered the option of a referral to another lender. Referral fees are often prohibitively high for CDFIs to afford to participate

in the platforms and as few as 8% of formal declines are referred on using the current platforms. In an average year around £25 million of loans are funded through the bank referral programme, when at least £1.4 billion of loans are being formally declined each year. CDFIs play a unique and critically important role in improving access to finance for small businesses. They can say yes when other lenders say no, and their loans repay better than banks when lending to small businesses without collateral. But their potential has not been maximised. Scaling up the CDFI sector would mean more fundable, creditworthy businesses that are currently declined or discouraged from applying for finance would be able to get the funding they need to invest, innovate, grow, and contribute to a more productive economy. NACFB | 47

Industry Insight

Rounding the circle Later stage funding for established businesses Neil Rudge Head of Enterprise Shawbrook Bank

ommercial finance brokers know that ‘cash is king’ when running a business, and many business owners will use finance to support liquidity and growth at critical stages of their journey. From start-up, to scale-up, through to exit, all stages in the life of a business are a vital part of establishing the legacy that an owner will leave behind. Access to funding is often a key component in transforming an idea into a reality although it is just as crucial for relatively established businesses, whose owners are looking to further expand, exit, and importantly, leave a legacy.

Scale-up funding The scale-up phase is reached when the business feels confident in its foundations and market proposition, and money is needed to invest for expansion and scale. At this point, brokers can suggest a greater range of funding options to support the costs of opening additional sites, investing in new technology, expanding production capacity, growing the salesforce and seeking out acquisitions to fast-track growth. In addition to debt funding, venture capital trusts or regional growth 48 | NACFB

funds are viable options for equity investment which will dilute owners’ shareholdings but not place additional financial obligations on the business. Often, a combination of debt and equity works well at the scale-up stage.

Exit stage funding Once a business has reached maturity, owners will often look to exit, either in full or in part. In our experience, particularly for small businesses, the exit manifests in a variety of forms; as a sale, a merger, or an acquisition. Often, the owners will look to exit through a sale of their shares. Two popular options are selling the shares to a private equity investor who has the expertise and capital to take the business to the next level or selling shares into an Employee Ownership Trust for the benefit of the staff. In both scenarios, the business is typically able to borrow a material percentage of purchase price, reducing the amount of equity required. High growth companies may also choose to go public, particularly on the alternative investment market (AIM market) as it caters to smaller businesses and allows them greater access to capital from the public market.

High street banks vs specialist lenders Whilst it is important for brokers and their clients to consider the types of finance available, it is equally as important to think about

the main objective or purpose of the funding, and whether flexibility or cost are the most important factors. Most high street banks will offer a variety of products and services including variable rate or fixed rate loans, business accounts and even offer additional benefits such as access to business advice or support with international expansion. However, these banks also tend to have strict criteria which can make it difficult for small business owners to get access to the finance they need if they sit outside of the standard risk model – even if they have a really interesting story to tell. This is where exploring finance facilities from a specialist lender can add value. Specialist lenders tend to be very flexible in the way in which they can provide facilities, working with a business to really understand its needs and providing a tailored solution that is right for them. Their relationship managers will typically have fewer clients than a high street bank counterpart, which allows them to spend more time understanding the ins and outs of a specific business. This means complex cases can benefit from the increased attention, making it much easier to secure the right type of finance and importantly ensure support continues through the life of the loan.

Commercial finance brokers step forward No matter which type of finance or funding provider is chosen, understanding the financial options available can help optimise the way cashflow is managed, ensuring that the business can continue to grow. One thing we see in a lot of owner-operated businesses

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Owners are talented in their specific fields, but may not be as well versed in finance, which can hinder their business' growth. Obviously, that is where commercial finance brokers play a key role

is that owners are talented in their specific fields, but may not be as well versed in finance, which can hinder their business’ growth. Obviously, that is where commercial finance brokers play a key role, carefully considering the wealth of options before selecting and proposing a facility that caters to each client’s circumstances and the growth potential of the business. NACFB | 49

Industry Insight

All aboard Big wins for specialist property finance brokers in 2024 Ian Humphreys Founder & CEO Brickflow

he economic outlook ended on a relatively positive note in 2023 and forecasts for the new year ahead currently indicate more stability, reduced borrowing costs, and a handle on inflation. This year won’t be all plain sailing of course as the markets navigate another devastating war, major global elections, and the lingering risk of recession. But the volatility of last year has created opportunity for those who know where to find it, and there is undoubtedly some low-hanging fruit for brokers as we head into 2024.

Bargain hunters Whilst interest rates shouldn’t rise further, the impact of the rapid increases is yet to be fully felt. Investors carrying too much debt will be forced to sell in sub-optimal conditions and bargains will be there to be had. Brokers who can get this message across to developers, and who have the lending contacts to exploit these opportunities, will win big.

Auction activity The impact of 14 consecutive interest rate hikes and mortgage rate increases made 2023 a stellar year for auction sales, with many auction houses reporting record-breaking figures. Whilst the market will likely soften slightly, the first half of this year looks set to continue in the same vein, with debt-heavy developers seeking a quick exit. Brokers with the ability to transact swiftly will find an abundance of opportunities from clients snapping up auction stock.

Bridging the gap With force d sales on ‘distressed’ property, developers caught out by planning delays and the impact of subdued transactional volumes, 50 | NACFB

comes discounted property, so we’re expecting the bridging market to be particularly buoyant as investors look to secure deals quickly. In Q4 2023 our platform recorded 741 searches for bridging loans, with brokers securing 63 Decisions in Principle (DIPs).

Planning ahead Property prices will be subdued, primarily due to depressed transactional volumes but the closer we get to interest rate cuts, which many forecasters believe will start around May, we’ll start to see activity increase and a market in growth again by Q3. Predicted wage rises and the UK’s massive undersupply of housing points to a price spike in 2025, so developers and investors buying this year and delivering next year will be the ones to profit.

Embedded finance For more than a year now we’ve been calling for brokers to embrace ‘the future’ of the commercial real estate (CRE) market. Now we’re asking them to embrace ‘the now’. Embedded finance is already penetrating the market and it’s the quickest most efficient way for a broker to expand their reach, generate leads, and provide clients with a seamless borrowing experience. In our opinion, the train has left the station and brokers and agents who don’t get on board will be left lagging behind.

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Brokers with the ability to transact swiftly will find an abundance of opportunities from clients snapping up auction stock

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Industry Insight

Out of office? Is a two-tier market now inevitable? Karen Mason Co-founder Newmanor Law

2030. However, on September 20th 2023, Rishi Sunak announced that the proposals were to be discarded due to concerns about the burden being passed onto tenants in the form of increased rents. Whilst this is good news for landlords facing costly improvements, it will be frustrating for those who have already invested in upgrades.

ince 1st April 2023, MEES (minimum energy efficiency standards) regulations have made it illegal for landlords to continue letting commercial properties with an EPC rating of ‘F’ or ‘G’ (unless exempt).

Many will have been preparing for the harsher MEES regime for some time by gradually improving their portfolios. Nonetheless, those who have already made improvements continue to enjoy a competitive advantage.

This places sizeable potential investment demands on landlords, however, creating office spaces with excellent amenities and green credentials can yield great returns, especially as the push to return to offices persists.

Green premiums

Many businesses seeking desirable premises to enhance their reputation and marketability are willing to pay higher rents for such spaces. However, this raises questions about the long-term prospects for older, lower-quality office stock. If there is no rental demand, is it viable to invest in greener upgrades? Will this lack of funding for improvements diminish the property’s sale value if the landlord wishes to sell it? The office lettings sector still offers opportunities for quality property acquisition, but a divide is emerging, leading to a two-tier market where affluent investors succeed while smaller landlords struggle to compete.

Current market In 2021, the UK Government proposed enhancing energy performance in properties to achieve net zero by 2050. The two-stage approach required non-domestic rented properties to have a minimum EPC rating of ‘C’ by April 2027, and ‘B’ by April

In recent years, the office sector has witnessed the emergence of a “green premium”. According to an MSCI analysis, for instance, premises with green credentials are in London 26% more expensive than those without. On the other hand, older, less environmentally efficient buildings are now linked to a “brown discount”.

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Many businesses seeking desirable premises to enhance their reputation and marketability are willing to pay higher rents for such spaces

NACFB | 53

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Trophy buildings will always be in demand since there will always be new tenants wanting to make an impression

The growing focus on sustainability has resulted in lower rental or selling prices for landlords, as well as challenges obtaining capital for improvements or upgrades – leading to an unenviable decision between cutting emissions or cutting overheads. There remains, however, a demand for green workspaces despite the higher expenses, and many businesses have made sustainable office space a priority. According to the global JLL Future of Work Survey 2022, 74% of surveyed companies (represented by 1,095 senior corporate real estate decision-makers, from 13 countries) would pay a premium for green credentials, with 56% planning to do so by 2025. The reasons for this are many, such as decreased energy and operating expenses, increased environmental and corporate social responsibility, and better recruiting and retention.

Occupancy Trophy buildings will always be in demand since there will always be new tenants wanting to make an impression. However, there is a shortage of both high-end renovated and new-build properties, which will push up rentals. This creates a bit of a catch-22. Short-term, rent from secondarygrade buildings in need of improvement will be lower, meaning landlords will have less money to spend on upgrades at a time 54 | NACFB

when rising interest rates will make their mortgage burden heavier. Some will be able to secure the investment necessary to draw in these higher-paying tenants, either directly or through outside investors; however, others won’t be able to find the money or justify the expense in the current market. Their pool of possible tenants will consequently be much smaller. This has led to an increase in vacant space. According to a 2023 survey (reported in Property Reporter), 84% of landlords stated that their occupancy was below 70%, and 53% reported their offices were only half full. However, of those with the strongest green credentials, 56% had offices with over 70% occupation.

The future The demand for conveniently located and sustainable buildings, fuelled by hybrid working, exceeded supply in 2023. Plus, out of the office spaces under construction and set for completion in 2024, 37% were already leased off-plan by the end of last year. This increased demand has depleted the development pipeline, leading to competitive tension and higher rents in the high-end market. Some tenants may consider investing in technology to facilitate better remote operations instead of leasing lower-grade premises, resulting in unresolved vacant office units. As such, landlords must assess their market position and may need to make ‘some’ investments to stay afloat, even if they don’t compete in the top tier.

Broker Voice

The going rate? How the nuances of the commercial mortgage market impact pricing

Lucy Waters Managing Director Aria Finance

t’s been a while since borrowers have had much in the way of good news. Therefore, you can understand the buzz surrounding the recent falls in mortgage rates. Whilst borrowers will likely pay much more than they were when they come to remortgage, the outlook is looking much better than it was last year. Swap rates have fallen significantly over the past few months, giving residential and buy-to-let lenders enough wiggle room to sharpen their ranges significantly. A couple of residential lenders have even broken below the 4% barrier, something that would have seemed almost impossible even a few weeks ago. However, while homeowners and landlords are benefitting from the sharp fall in swap rates, commercial mortgage customers aren’t. But why? The most obvious reason, of course, is that there are many more lenders in the residential and buy-to-let markets. UK Finance, the trade body, puts the number operating in both sectors at around 60-70, whereas there are fewer operating in the commercial mortgage market. When you have such intense competition, as there is in the residential and buy-to-let markets, it acts as a natural cap on rates as lenders fight each other for business. That effect is watered down in the commercial mortgage market, where competition is less fierce. Another reason I believe we have not seen a so-called ‘rate war’ in the commercial mortgage space is down to the structure of the sector itself. If you look at the residential mortgage market, there are not only a large number of lenders, there are also a large variety of business and funding models. For example, you have building societies, which rely on savings deposits; non-bank lenders, which fund through wholesale markets; challenger banks, which use both; and the high street lenders, which have deep and varied funding sources. From a market perspective, that has many advantages. If, for example, the wholesale markets dry up, non-bank lenders would suffer. But you may find building societies, which are reliant on savings deposits to fund lending, are less affected. If you look at the commercial mortgage market, on the other hand, it is dominated by a small number of challenger banks with very similar business models and funding sources. These lenders have been fantastic over the past 12-18 months and have demonstrated their commitment to the sector time and time again. The commercial mortgage market is a better place for them. But my point is the uniformity of lender profiles in the commercial mortgage market may be holding the sector back and hindering the rate cuts we have seen in the residential and buy-to-let spaces.

Before pressing on, it’s worth quickly recapping how challenger banks raise money for new lending. While they can and do tap up the wholesale markets, they usually do so on less favourable terms than the high street lenders. Naturally, that makes them more reliant on savings deposits to fund lending. As a result, it means their pricing is less affected by swap rates than a lender that exclusively raises their funding from the money markets. It also means that their funding costs rise in line with savings rates which, as we have seen, are higher now than they have been for more than a decade. Therefore, in the current environment, commercial mortgage lenders have little choice but to keep their rates higher. Commercial mortgages are also 100% risk-weighted, meaning that the cost of capital is higher. The issue is commercial mortgage borrowers, understandably, don’t want to borrow at 8-9%. They see what’s happening in the residential and buy-to-let markets and decide they’ll weather the storm until commercial mortgage lenders follow suit. This is impacting volumes. So, what can give the commercial mortgage market the boost we’ve all been waiting for? Quite simply, a fall in interest rates. If the Bank of England lowers rates, it will bring down the cost of funding for challenger banks, allowing them to sharpen up their pricing. A few months ago, I would have said such a scenario was very unlikely, but we’ve come back from the Christmas break to predictions of as many as four rate cuts this year. I think that may be slightly overoptimistic, but it does feel as though a rate cut is closer than it has been for a long time. Until then, it’s likely that the commercial mortgage market will continue to tread water, as it has done for much of the past 6-12 months. But if the BoE does push the big red button on an interest rate cut this year, as expected, we should probably expect activity to pick up rapidly. Here’s hoping.

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The uniformity of lender profiles in the commercial mortgage market may be holding the sector back and hindering the rate cuts we have seen in the residential and buy-to-let spaces

NACFB | 57

Opinion

Hedging your bets How brokers can help SMEs mitigate risk Leeann Nash Head of Corporate Sales Currencies Direct

he recent shifts in monetary policy, alongside economic uncertainty, geopolitical tensions, and huge supply-side shocks, have caused notable volatility in the currency market.

Mitigating currency risks For finance brokers and their clients dealing in multiple currencies, the big swings in exchange rates introduce additional risks. Fluctuations make it difficult to budget, while negative shifts in a currency’s value can bring big costs. One key way to mitigate the risks of unfavourable foreign exchange (FX) movements is to use a forward contract. Forward contracts allow you or your client to lock in an exchange rate up to a year in advance of making a transfer. While you won’t benefit if the rate improves, you will be protected if the market moves against you. You’ll also have certainty, knowing exactly how much you’ll receive when you make a transfer.

Interest rate hedging Although central banks seem to have ended their recent hiking cycles, uncertainty remains around how long rates will remain elevated. Meanwhile, many economists warn that the world could face more frequent shocks, requiring policymakers to tweak interest rates more often. 58 | NACFB

To tackle the risk of changing interest rates, commercial finance brokers may want to consider whether certain interest rate hedging products are suitable for their clients. The certainty they provide could help businesses make sustainable choices while providing protection from unexpected shocks in the future. Brokers can upsell these products to add value and potentially increase business when demand for lending is low. Meanwhile, lenders may benefit from the reduced risk of a borrower defaulting. It’s vitally important, however, that interest rate hedging products are sold to customers appropriately and in the right circumstances. Mis-sold products create risks, rather than mitigating them, increasing the chances of a default as well as regulatory and reputational consequences for all involved.

Regulation and reputation Being vigilant is important for ensuring regulatory compliance. It’s always best to err on the side of caution and keep meticulous records so that you can show that you’ve acted ethically and responsibly. In addition, keeping up to date with developments in the sector gives you more space to adapt to any potential regulatory changes, such as the recent Consumer Duty. Operating with regulatory excellence will also help you build a strong reputation, which is vital for any business’s long-term success.

Building resilience While the global interest rate outlook remains uncertain, you can still help your clients to prepare for the challenges ahead. Take the time to assess the specific risks facing your clients’ businesses and look for areas where you can help them to build resilience.

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Opinion

Small business matters A wish list to support SMEs in 2024 Martin McTague National Chair Federation of Small Businesses

rowth over 2023 hasn’t been where we would want and need it to be, although at least inflation has fallen back from last year’s record highs. The base rate has plateaued at a level which is piling pressure on small firms’ margins and consumers’ willingness to spend. We must be alive to the risk that interest rates will stay too high for too long, which would harshly curtail economic growth prospects. Our Small Business Index research found that confidence levels among small firms lost ground in the final quarter of 2023, falling to -15 points, down from the -8 recorded in Q3, and on a par with the -14.2 registered in Q2. Retail and hospitality firms, however, had lower confidence readings than other major sectors, raising fears of yet more distress and closures among these sectors. The funding situation for small firms has become markedly less hospitable as rates have risen. Access to finance will be crucial to get the economy moving again. We have raised a super-complaint with the Financial Conduct Authority (FCA) regarding lenders’ use of personal guarantees, even for relatively small loans. We’re asking the FCA to undertake work to assess the extent of this practice, and then consider asking the Treasury to expand its regulatory perimeter to help more small businesses affected, typically limited companies where directors provide personal guarantees. Continued funding for the government-backed Recovery Loan Scheme must also be put in place, as its future is currently in limbo. The Spring Budget is an opportunity for the Government to raise the VAT threshold and bring in a smoothing mechanism, to make the threshold less of a cliff-edge. We’re looking for the Employment Allowance to rise to maintain its parity with the National Insurance 60 | NACFB

costs for four fulltime National Living Wage (NLW) employees, following a rise in the NLW at the Autumn Statement. There are a host of other measures the Government could also take. Restoring tax-free shopping for overseas visitors would support tourism and retail. Small business-tailored policies in the net zero space, such as our proposed ‘Help to Green’ scheme, which would allocate vouchers to small firms to spend on improving energy efficiency or reducing their carbon footprint, would help firms themselves, the environment, and the economy in one go. There’s a strong likelihood that 2024 will see a general election, and all the major parties should ensure that small firm-friendly policies are at the heart of their manifestos. The long-promised but elusive rethink of business rates is high on our priority list, as is tackling business crime, especially organised shoplifting and fraud. It is as always, the 5.5 million-strong small business community which contains the greatest potential for growth, as entrepreneurs start new ventures, and ambitious small firms look to scale up.

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All the major parties should ensure that small firm-friendly policies are at the heart of their manifestos

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Opinion

Back in the office Realising commercial real estate opportunities Nigel Smith CEO BloomSmith

pportunities abound for shrewd commercial real estate investors as we see the green shoots of recovery heading into 2024, and brokers have a critical role to play in this market gasping for liquidity. 2023 was a year of unfettered challenges for the UK’s commercial property sector. Inflation peaked at 9.2% and Bank of England interest rates ended a series of 14 consecutive increases to hold at 5.25%, setting an economic environment that has seen the prices of various asset classes tumbling over the past 12 months. Nowhere has this fall in valuations been felt more painfully than in the realm of office space real estate, where the post-pandemic popularity of working from home has compounded economic pressures and promoted huge re-appraisals in asset prices. The capital value of office spaces is understood to have fallen as much as 7.4% across 2023, with vacancy rates in the London office market hitting a 30-year high. Much as retail warehousing has proved to be a popular buy for investors who believe it has been criminally undervalued (due to over-corrections concerning the trend towards online shopping), the office space sector presents excellent value opportunities over the coming year. Office spaces have become the most traded commercial property asset class in 2023, with investors reappraising their portfolios following a tumultuous economic period, and a proactive market represents plenty of opportunities for intelligent investors to snap up high-quality deals. Despite values falling starkly over the past 12 months, many leading analysts expect solid growth in the rental values achieved for prime office space (especially as a growing number of businesses push towards a return to office work), coupled with respectable capital 62 | NACFB

asset growth over the medium to long-term. All this indicates that investors who can finance new purchases could be snapping up potential cash cows at good value following recent pricing corrections. There has been a groundswell of confidence in recent months that we’re set to see a recovery within the commercial property market. Transactions volumes are creeping up, inflation is falling, and central interest rates have stabilised, with many predicting that they will finally drop at some point in the coming year. However, we cannot shy away from the fact that this is a downturn from which many property investors will emerge battered and bruised. Inflation and the end of cheap borrowing has presented liquidity challenges for many investors. Brokers have an integral role to play in facilitating deals if the opportunities that commercial property currently presents are to be realised. The ability of investors to call upon brokers’ expertise and carefully curated relationships with senior lenders will be crucial to seizing opportunities and delivering mutually beneficial deals for all parties.

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Office spaces have become the most traded commercial property asset class in 2023 … and a proactive market represents plenty of opportunities for intelligent investors to snap up high-quality deals

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I NTERM ED IARIE S ONLY Commercial Mortgages provided by YBS Commercial Mortgages are not regulated by the Financial Conduct Authority. YBS Commercial Mortgages is a trading name of Yorkshire Building Society. Yorkshire Building Society is a member of the Building Societies Association and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Yorkshire Building Society is entered in the Financial Services Register and its registration number is 106085. Head Office: Yorkshire House, Yorkshire Drive, Bradford BD5 8LJ. YBM 11428 11 01 24

Listicle

ways the NACFB backed brokers in 2023

ast year was marked by successive interest rate rises, continued economic and political instability, volatile inflation, and a persistent cost of living crisis. Despite these challenges, the Association continued to actively support and empower the UKʼs largest network of commercial finance brokers, harnessing the community’s collective strength. Below is a selection of just five significant ways the trade body backed brokers – and the wider lending community – last year.

1. Introduction of the NACFB Assurance A transformative initiative replacing previous broker standards with a more dynamic, outward-facing accreditation process. “This new approach ensures that Members not only adhere to regulatory requirements but can also more easily demonstrate to their clients and lenders robust business processes and integrity, reinforcing the NACFB’s national reputation for excellence,” stated NACFB Chair Paul Goodman. As the NACFB Assurance develops further in 2024, it will provide Members with greater empowerment and visibility, whilst further solidifying the trade body’s commitment to upholding the highest industry standards.

2. Comprehensive Consumer Duty support

4. Enhanced protection through the NACFB Mutual

Anticipating last summer’s Consumer Duty deadline, the NACFB developed a comprehensive support package to assist brokers in navigating the new regulatory landscape. “Our online Consumer Duty hub remains live and continues to offer bespoke guides, custom templates, and FAQs, empowering Members with the right knowledge and tools they need,” explained James Hinch, head of compliance. “Our ongoing engagement with brokers, lenders, and regulators ensures a consistent, informed approach, reflecting our commitment to supporting NACFB Membersʼ operational success,” he added.

The NACFB Mutual, launched to combat rising professional indemnity (PI) premium costs, now covers 68% of Member firms. Nicholas Murphy, head of membership, elaborated: “Our tailored PI cover reflects our understanding of the diverse needs of the membership. We are proud of the significant savings the community has so far achieved. The NACFB Mutual is testament to the trade body’s dedication to safeguarding Membersʼ professional interests whilst ensuring they have access to comprehensive, affordable protection.” 2024 is set to provide even further value as the Mutual’s strong performance enables the trade body to proactively explore profit sharing initiatives for policyholders.

5. Championing intermediaries in Westminster

3. Bringing the lending community together The NACFB’s events, including the flagship Commercial Finance Expo and the Summer Party, were clear highlights of the year. Events manager Rebecca McGarrity noted: “These gatherings are more than just events; they’re platforms for knowledge sharing, networking, and partnership building. The NACFB Expo offered insights into the latest industry trends and innovations, while the Summer Party provided a relaxed environment for celebrating our collective achievements. In-person events underline the importance we place on community building and professional development within the commercial finance landscape.”

64 | NACFB

The NACFB significantly ramped-up its advocacy efforts, influencing policy and regulatory decisions at the very highest of levels. Buoyed by a record breaking £45 billion originated by NACFB Members in 2022, the trade body enhanced its engagement with key political figures and actively contributed to vital industry discussions. “Our submission of written evidence to the Treasury Select Committee and more future-focused collaborations with political figures like Rachel Reevesʼ shadow Treasury team underline our commitment to shaping policies that directly impact SME financing,” Paul Goodman stated. Adding: “2024 is an important year for the trade body and the country, and I am certain our contributions can improve the standing of both.”

Five Minutes With

ive F Minutes with: Eshna Harper Eshna Harper Central Business Development Manager Allica Bank

Congratulations on winning NACFB Rising Star of the Year 2023; where do you keep your award trophy?

What was your first car? Did you name it?

What attracted you to work for Allica?

A Nissan Micra, called Matilda.

Having engaged with Allica in a broker capacity prior to joining, I knew and liked

My trophy sits right next to my laptop on my desk, it’s motivational!

What is your ultimate movie snack?

If you have a pet, what is it and what’s its name?

The Tango Ice Blast is the main event, the film is just a bonus.

I have a Cavapoo called Ernie and anyone who has spoken to me for more than 30 seconds knows of his existence.

What’s your favourite bad joke?

What have you checked off your bucket list? Last year, me and some of my amazing team embarked on the 10 Peaks Challenge. We raised £10,616 in support of Allica charity, Blood Cancer UK and the NACFB charity, The Newman Holiday Trust. It was the hardest thing I’ve ever done both physically and mentally. I don’t think I would have managed past the second peak without my amazing team of work friends around me. 66 | NACFB

What do you call a magical dog? A Labracadabradoor!

the product, which obviously makes thing easier. But the people and how they treat their people is what really sold the job to me.

What are some skills or strengths you bring to the team?

What’s your favourite sandwich?

Positivity and optimism. I really do believe there is a solution to everything and getting upset isn’t working towards that solution in any circumstance.

Plain ham and butter, no need to overcomplicate things.

Did you pick up any work habits during lockdown?

What’s your favourite work-from-home accessory?

Pre-lockdown I carried around an A4 notebook that I wrote everything down in. Now, though, I live and die by OneNote. Lockdown forced us to give up printing and highlighting, and I for one am here for it.

I have a chair next to mine that my dog sits in, unless he’s sleeping behind a curtain.

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87% of commercial mortgage brokers rated their overall experience with Allica Bank as good or excellent. Source: Allica Bank’s Q4 2023 Broker Survey of 506 brokers

Find out more at allica.bank/introducers or give us a call on 0330 094 3333

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