Direct to bank or via a broker?

In 2016 we saw many of the high street banks continue to restructure and downsize their offerings to SMEs. But how has this affected companies trying to get a commercial mortgage or refinance their business premises? Andy Elley explains.

Generally speaking, the high street banks operate a tiered system for dealing with Small and Medium-sized Enterprises (SME). Very small businesses, and by that I mean sole-traders, will deal directly with the bank online, by phone to a call centre or over the counter.

Slightly larger businesses, say a retailer with one shop, is likely to be serviced by a relationship manager who has a portfolio of around 500 other businesses to look after.

If your business is a bit bigger, say you own two or three shops or have a small firm with a handful of employees, you are likely to have been appointed a senior relationship manager who looks after around 250 other businesses.

And finally, SMEs that turnover c. £1-2m and more each year mostly fall within the remit of a commercial relationship manager.

Unfortunately, today, if you are an SME and you have approached your bank for say, a mortgage for your business premises, you may well have been disappointed. Over the last couple of years the high street banks have been restructuring and downsizing their commercial departments. This strategy might have helped the banks to balance their books but hasn’t much helped the businesses that they are supposed to be servicing.

Sole-traders usually find that bank call centre staff do not have the knowledge to help or even refer to the right department. Larger SMEs with relationship managers find that their contact is just too busy or too inexperienced to structure a deal that will lead to securing finance.

And it’s not just hearsay. At MFB we currently have 13 corporate clients looking for business owner-occupier mortgages who have been turned down by their banks on deals that, in the past, would have gone through without a hitch. Why? Well, in my opinion, it’s simply because these clients haven’t been able to speak to the right contact within the bank. But it’s not all doom and gloom - fortunately, they all found their way to our door!

As commercial mortgage brokers, we have a very different relationship with the banks (and other commercial lenders) than those SMEs who are in need of the finance that is on offer. Banks employ business development managers (BDM) who are appointed to work specifically with brokers. These BDM visit our offices regularly in order to drum up corporate business which means we are well-placed to negotiate deals for customers that might have struggled when going direct. The BDMs we see have a “can-do” attitude to get deals done (of course they do, they are paid commission!) and many have quite a bit of clout with their respective credit departments. Focused individuals, they are not afraid to think outside the box or challenge their underwriters if necessary. Of course, we have been nurturing these relationships for years but their names are top secret…

Looking back at 2016, 61% of the corporate customers I helped were those looking to exit lease arrangements in favour of buying freehold premises. My clients included hoteliers, publicans, graphic designers, accountants and specialist medical consultants. Perhaps most striking was the fact that 82% of these clients already had existing business banking relationships with the main high street lenders!

The remainder of my corporate clients were either looking to raise capital (for either development or additional purchases) or they were looking to remortgage away from their existing lender onto a better deal.

When looking at pricing, commercial mortgage rates on the high street were very competitively priced last year, particularly ones from the state-owned banks, where you could expect to achieve Bank Rate (currently 0.25%) plus 2.85% - 2.93% with a term mortgage between 15 and 25 years.

Lenders which I would class as middle-tier, (naming no names!), weren’t too far behind offering between 3.21% - 3.92% plus Bank Rate with terms again of 15 to 25 years, and interest only for short periods if, for example, the premises required fitting out.

The specialist lenders were naturally pricier but remember they don’t insist on having your daily business banking – good for those who prefer not to keep all of their eggs in one basket. Pricing stood at around the 6%-6.5% mark. These lenders can often be more flexible in terms of debt serviceability, particularly for businesses with lower profits.

Moving into 2017, pricing remains similar with processing timescales at as little as 7-8 weeks from application submission to completion. Remember, it’s the bit beforehand that takes the real time – understanding your business, your circumstances and your financial requirements before identifying possible lenders and putting together the business plan. So, if you are looking for a commercial mortgage this year and want talk through the options, my advice would be to get in touch sooner rather than later.

Profile: Andy Elley

Call: 01732 471644 or 07964 916503.

Email: andye@mortgagesforbusiness.co.uk

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