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Check the diversity as well as strength of your funding line

It is a sad state of affairs when funding lines are all the rage but right now the funding lines of short-term lenders appear to be, well, all the rage.

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For a number of reasons, they have been in the news a lot lately.

But beneath the individual stories is something that I have not seen addressed much – why are they so important and what should brokers look for in a lender in terms of how it is backed?

To answer the first question, funding lines are important because they determine the parameters around which lenders can lend – and the speed with which they can lend.

For example, a lender backed by an investment fund will be able to lend more quickly and flexibly than one backed by a private bank, which will tend to be more cautious.

The long and the short of it is that funding lines are arguably the most fundamental part of a lender’s proposition.

Every broker should ask questions about them before they proceed to do a deal.

The long and the short of it is funding lines are arguably the most fundamental part of a lender’s proposition

Funding lines effectively determine a lender’s financial strength.

The more robust the entities providing them, the more robust the lender.

It is as simple as that.

After all, as brokers, the last thing you want to deal with is a lender that has to call in part or all of its loan book suddenly, or cannot lend because of insufficient liquidity.

While robust backers are crucial, what is also good to see is a lender with diversified funding lines.

A lender with all its eggs in one basket is naturally more geared than a lender that can draw on multiple sources of capital.

So a split across investment funds, family offices, private banks and even high net worth individuals can reduce risk.

In other words, look for diversity of funding lines as well as strength. This reduces funding line volatility, namely the situation where a lender is flush one month but illiquid and unable to lend the next.

It is also important to look for a lender that is always seeking to evolve and widen its funding base, not remain static.

As well as adding extra diversification, this shows that a lender is in it for the long term, not just to make a quick buck.

And that is probably the most important thing of all.

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