As consumers we all shop around to find the best product, service or price. However, this practice seems to go out the window when seeking commercial and business finance. Ralph Black, CEO at Commercial Finance Brokers UK (CFBUK), evaluates the reasons and pitfalls behind this trend.
The financial services industry has changed significantly over the last 25 years. We’ve moved from the opaque world of tied sales forces and the dominance of high street banks, to the information era with comparison websites showing products from almost all providers. We’re more aware of what to look for, where to look and more confident in the regulation of the industry.
So why has the commercial finance market been left behind? Most commercial and business finance is placed directly with the ‘big four’ clearing banks. This is probably because all businesses have a business bank account and therefore an existing relationship with the bank. This may seem like the path of least resistance. Indeed, the business owner may assume that as his clearing bank already knows his business, and as such the process of gaining finance will be faster and less complicated – A dangerous assumption that overlooks a significant and potentially expensive disadvantage. Banks only offer their own products. They do not compare the market to find their customers the best deal. With no counter-offer to beat, they will find it easy close a deal with a slightly higher fee or lower loan to value. This can be a hefty price to pay for not shopping around.
Equally as significant is the fact that, since the credit crunch, the big four high street banks have been extremely conservative in their lending policies. They only grant new loans to ‘gold plated’ clients – the ultra-safe bets. What’s more, a significant number of new, challenger lenders have entered the market and are actively seeking to lend money to businesses – and are prepared to lend where the traditional lenders fear to tread. Many of these challenger lenders are not well known and as such are tricky to identify and contact. Furthermore, even if you do find them, actually getting to speak to the right person will also be difficult. Having said that, finding the right person to talk to at your current clearing bank can often be much more difficult for you as a client than it is for a firm like ours.
Businesses need to know their options and this means that we need to raise the profile of whole-of-market commercial finance lenders and the brokerage services available to help businesses to find the best deal. By using a whole-of-market commercial finance broker the lender knows they are in competition with other lenders so will put their best deal forward in order to win the business.
Another issue is trust. The commercial mortgage sector has not had the media attention that the residential market has in recent years. It has, however, taken steps to raise its regulatory profile and build credibility and client protection. The FCA is currently reviewing regulation within the commercial and business finance sector and that means that client protection will increase. However within the industry we have already begun taking steps to self-regulate. Brokers taking their responsibilities seriously will be members of the National Association of Commercial Finance Brokers (NACFB) and will have the appropriate permissions from the FCA (Financial Conduct Authority). This means that prudent business owners can check with a whole-of-market broker before accepting their bank’s own loan. They can also check the broker’s credentials beforehand to ensure they get the quality of service that they deserve.