As with supermarket customers, brokers tend to stick with one or two brands, so bridgers would do well to diversify
The short-term lending sector continues to reflect the development path of UK supermarkets.
The likes of Masthaven, Precise, Shawbrook and UTB all raise capital through retail deposits, meaning the cost of capital is low and interest rates are too but largely for low-risk, vanilla lending. If one compared bridging lenders to supermarkets, this pool would be Tesco: established brands, customary product range, good service and economical.
One could argue Lidl or Aldi would be more appropriate with price as a fundamental differentiator, but both offer a quality product and service.
Discounters are challengers and disruptors, striving to provide excellent customer outcomes but recognising that lower-cost products are often detrimental to user experience. In some respects, certain building societies engaged in bridging act like discounters. Pricing is low but applications are assessed on a full-status basis, sometimes with bizarre restrictive criteria. Low resources can also lead to much longer completion times – like endless supermarket queues due to fewer checkouts and staff.
Principal lenders unable to compete on price (otherwise known as ‘reassuringly expensive’) need to do so in other forms, typically leverage, status, charge rank, term or asset class.
This part of the market falls within two distinctly different camps: convenience and luxury. They target areas not serviced by the middle market but you will pay more for exotic or diverse products, better-quality service and highly skilled staff.
Convenience stores exist to make our lives easier. Customers are willing to pay more because they get what they want more quickly and easily. Lenders such as Affirmative, Lendinvest, Lowry Capital, MT Finance and Together offer such convenience. The bare minimum is requested to ensure they appropriately assess the security and prove a viable exit strategy. They focus on delivering funds as quickly as possible.
This type of lender is also expanding its product range. MT Finance recently announced it would lend against commercial and semi-commercial property, which means it can assist more clients.
Waitrose describes itself as “combining the convenience of a supermarket with the expertise and service of a specialist shop”. Some lenders have highly experienced staff who can cater for complex transactions while maintaining a relative form of convenience. Like Waitrose, they are specialists, and include the likes of Lendinvest, Octane, Octopus, Pluto and UTB Structured.
These lenders tend to target a higher interest margin than the middle market but are able to cater for specialist needs, such as offshore, corporate or trust lending entities; larger-ticket, longer-term, multiple-asset class security; first and second charge ranking security; higher-leverage, medium-term buy-to-let with rental stress from 100 per cent pay rate; and refurbishment/development funding. If your recipe demands a kiwi berry, pop to Waitrose rather than Sainsbury’s.
A relatively new entrant is peer-to peer lending. These firms have varying levels of sophisticated digital platforms to perform intermediation but still rely on a manual process to assess risk. They are the equivalent of Ocado: slowly growing but still lacking mass-market appeal.
Lenders do not always fall into one distinct camp. In fact, the best possess characteristics within every category, Together Money being a perfect example.
Lenders should not diversify without suitable experience and understanding of the subsector in which they wish to trade, but it is important they review the virtues and pitfalls of other lending practices. The skill is ensuring sensible lending when it may be easier to neglect short-term principles in favour of profit.
Diversification is crucial to the success of some lenders but it would be good to see others, known for attracting low-price, vanilla bridging, embrace different forms of risk.
Lending only on prime bridging business enables relationships to be developed elsewhere. As with supermarket customers, brokers tend to remain loyal to just one or two brands. Delivery is essential and, every time a lender says “We don’t lend for commercial, land, second charge, offshore companies or those with imperfect credit,” the broker is forced to find another retailer that does.
Chris Fairfax is managing director at Positive Lending