When some lenders grow, the structure of their product and price offerings gets more complex and automated systems cannot cope
As a keen amateur observer of science, including studies of the evolution of biological complexity, it struck me recently that multi-cellular organisms appear very similar to financial institutions in some respects.
Put simply, in order to grow and evolve there is a necessity for ever more complex overall structure but, in some cases, division of existing cells into smaller and conversely simpler units.
To those of you starting to think I have had a bit too much sun, let me explain where this tenuous comparison has come from.
As most readers know, we offer a whole-of-market commercial broker service, encompassing all lender types from the mainstream banks to the much more niche and unusual funders. We have watched the launch (sometimes relaunch) of numerous lenders into the market over the past few years, with many subsequently going from strength to strength.
A lot of the challenger banks, once called alternative lenders, are no longer considered as such, instead viewed as mainstream lenders without the branch networks and legacy debts of many of the longer-established banks.
Over time, the range of products and services available from such lenders has grown, as they have become more confident in certain markets and, to a degree, better funded for those markets. By necessity, the options on offer have become more complex, making it vital for clients to receive the best possible advice from their broker regarding the best deal available to meet their specific needs.
This is, of course, only part of the range of funding available from the 100-plus lenders to whom we have access, with no sourcing system for commercial finance.
Irrespective of some views in the market, it is simply not possible to cover all the available options – providing real choice and, therefore, the best possible advice on commercial funding – by using an automated system. A huge proportion of the funding deals we place are negotiated with lenders via thorough assessment and analysis of the merits of the proposal, including all its nuances and complexities. I do not know of any machine that is capable of that right now.
Anyway, back to the main topic. As noted above, the structure of product and price offerings gets more complex as certain lenders fulfil their innate need to grow. This is achieved not only by adding more elements to their product range but by dividing some elements into smaller ones – like cells. Do you see what I have done there?
A simple example of this is a couple of lenders that have split a broader product for residential investment property funding into two sharper, more defined elements. This gives them the ability to reduce pricing when financing simpler assets for individuals but also to maintain (or, in a small number of instances, even slightly trim) the price of funding more complex assets such as houses of multiple occupation, multi-unit freeholds and commercial property, presumably by being able to better manage their cost of funds as a result.
As I have alluded to in previous columns, this has a welcome effect on the market overall by putting downward pressure on margins generally. This, in turn, enables us both to negotiate better terms with those lenders not operating fixed-price arrangements and to achieve better gearing as a result of improved rental cover against the lower price.
To those hardy souls who have stuck with me through to the end, my point is as follows.
The funding market, as it grows in both size and confidence, is getting and will continue to get ever more complex, not less. Automated ‘if this, then this’ systems are not currently the best answer for achieving TCF with commercial finance.
To make sure you and your clients are getting the best possible solution, ensure that any commercial broker or packager you intend to use understands not only the market itself but the full range of lenders both with and without specific lending products.