Today, Benson explains to B&C readers about the rise in alternative lending and bridging, but allays his fears with brokers…

Why is there a rise of the alternative lending sector?

Primarily due to the inability, indeed in some cases the unwillingness, of the traditional banking sector to meet the demands of borrowers. There is too much of a “computer says NO” mentality pervading much of the sector.

The age of the traditional bank manager, who had a flexible mandate, and knew his/her customers is long gone. The flexibility and ability of non-traditional lenders to assess credit risk and make quick decisions makes them a more logical place for small businesses to seek finance.

Banks, who are probably worried about the effect that recognition of the real value of so-called “Zombie” loans would have on their accounts; and faced with demand for higher capitalisation ratios, are reluctant to enter any areas which they consider to be risky. The main focus of banks still seems to be reinforcing balance sheets.

Awareness of alternative finance

The CBI recently published a report looking at alternative finance and Vince Cable, Secretary of State for Business, commented that “Britain’s businesses cannot grow, export and innovate without proper access to bank credit. But they also need alternatives when looking for finance, as a traditional bank loan might not always be the answer.”

The rise of bridging

In a recent United Trust Bank survey, 91 per cent of brokers stated the awareness of bridging finance has improved amongst their clients and more than half believed that the image of the industry has also improved over the past year.

The industry is also receiving good press, and the FCA has, due to the efforts of the astl, developed a productive and useful dialogue with the industry. Through the astl’s Code of Conduct and Value Charter the profile of responsible bridging lenders is improving.

Recently, HMRC has agreed to allow members access to its Mortgage Verification Scheme; a further indication of how far the image of the astl continues to improve.

Bridging finance enables projects to get off the ground quickly, and advantage to be taken when opportunities present themselves. Many bridging firms have close contacts with property developers and can react quickly when funding is needed.

According to the West One Index (Spring 2013), the annual growth in gross mortgage lending from 2011 to 2012 (as per the CML) was 1.4 per cent – in the same time annual gross bridging lending grew 72 per cent.

Although bridging lending at £1.57 billion (2012) is dwarfed by the £143 billion of total mortgage lending; it is growing at a substantially higher rate and is probably running at a much higher rate in 2013. Much of this growth has been in commercial lending.

Bridging firms are also starting to provide medium term loans, which will provide an exit route for bridging loans and further allow an alternative to non-receptive traditional funding sources.

Funders looking for decent returns have been eyeing the bridging sector, and some major banks are currently actively seeking bridging partners. At the astl, we regularly get requests from investors for guidance on how to start up bridging businesses. I always advise caution, as bridging can prove to be an expensive minefield for inexperienced lenders. Brokers also prefer dealing with established lenders, particularly members of the astl, as they know that enquiries will be dealt with efficiently, dealings will be transparent and commissions paid promptly.

FLS

The Funding for Lending Scheme has done little to improve matters – if anything, all it seems to have done is to bolster housing prices and to provide banks with some cheap finance to replace more expensive funding.
The scheme has been extended to allow access by alternative lenders, but this has to be done via their banks and one wonders if any will bother to hump the hoops required, and how helpful the banks will be in assisting them.

Challenges

Bridging finance is not a panacea for all funding challenges, nor should it be used as lending of last resort. Bridging is designed to fill a valuable need, to help people to get vital funding for a short period of time when they need it to buy a new property or to provide short term funding business purposes.

Some brokers perceive that “bridging is expensive” but often the cost is minor compared to the benefits it provides. For that reason alone, brokers have a valuable role to play to find out how bridging works and when it can be useful for their clients.