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The new bridging lender survival guide

The new bridging lender survival guide

As Funding 365 is now approaching its first anniversary it seems an appropriate time to reflect upon the various things that we’ve learnt over the past year.

As Funding 365 is now approaching its first anniversary it seems an appropriate time to reflect upon the various things that we’ve learnt over the past year.

Clearly we have learnt a lot... for example, the world remains big enough for airplanes to vanish without trace; Alex Ferguson is (probably literally) worth his weight in gold; the US Government has access to everything we say and write (although, after watching Enemy of the State in 1998, we already knew that). Whilst all of these things are interesting, our first year in the bridging sector has also taught us some invaluable business lessons.

As we are a generous lot at Funding 365, we thought we would put these down to share with other new entrants to the bridging sector (or to any incumbents who may have found themselves suffering from the growing pains that are inevitable when part of a rapidly growing sector).

Below is the resulting Funding 365 survival guide for new bridging lenders.

1. Know your competitive strength

When making your first steps into the bridging market it’s hard to know exactly what your strengths and weaknesses are compared to the incumbent lenders. In the early days of Funding 365 we had several demoralising conversations with brokers (who shall remain nameless) where they said, “we have 100 lenders, we use about 5 - I don’t think we need another lender”. Needless to say, within six months these same brokers were banging down our door because in actual fact they did need another lender; they needed one who offered super fast execution.

It became clear to us from that point forward that the Funding 365 set up (by luck more than by design, quite honestly) allowed us to offer significantly faster execution than that offered by other lenders in the market. This was our competitive advantage and it has allowed us to capture a decent share of the market in our first year.

Your organisation may have a competitive advantage in being more aggressive on HMOs, or more attracted to properties in Scotland / Northern Ireland / ex-London & South East, or perhaps you’re happier with commercial property than other lenders. You need to find out what your competitive advantage could be, focus on it, nurture it and market it.

2. Understand your funding constraints and originate accordingly

Whilst there are a handful of banks operating in the bridging space, bridging lenders are predominantly privately-funded organisations. Some organisations are funded by a few private individuals, some by accessing family offices and small investment funds and some have been bought out and funded by private equity sponsors.

Understanding your funding constraints is the single most important thing that any financial institution should worry about. It’s not just about the quantum of potential funding that you have access to; it’s the quality of the funding and its flexibility that really matters. For example, why did Northern Rock, Bradford & Bingley and HBOS all get into trouble? If your answer is, “they were writing bad mortgages”, you would be wrong, massively wrong (and almost seven years after the start of the crisis, even broadsheet papers (excluding the FT) are still feeding the populace this nonsense).

Northern Rock et al. got into trouble because they did not have appropriate focus on their funding sources versus the liabilities they were incurring. To be more specific, they had an over-reliance on the securitisation and covered bond market which, when these markets closed (due to losses arising on US sub-prime mortgage bonds), left them unable to fund their existing commitments to borrowers. The proof that the mortgage quality was pretty good is contained in the fact that the Northern Rock ‘bad bank’ has been profitable ever since it was created (which confounded many journalists who bought into the myth of poor asset quality).

In the bridging sector, things are (thankfully) somewhat more straightforward. You need to understand what your funders are happy for you to originate, where they will be flexible and where they will not, and the timescales that you will have to operate under to receive funding.

Since Funding 365’s funding is 100% controlled by its management team (who are also the credit committee), we can agree amongst ourselves whether we like a loan or not and therefore make decisions instantly (well, sometimes after a hot cup of coffee and a hotter debate). We do not need to strictly adhere to a matrix of LTVs or live by mantras such as, “we will never bridge a bridge”.

Ideally, you should only attempt to originate loans that you know your funders will accept without debate. If your funders delay approval of a particular loan or (as happens all too frequently) refuse to fund it at the last minute, this will sound a death knell for your relationship with the respective introducer and the borrower. Given that this is a small industry, word travels quickly and this failure will soon be known by everyone in the market.

3. Work with brokers who can be a long term partner

Our first year of business taught us that there are highly reputable and professional brokers / introducers / packagers (in Funding 365 we call them our ‘Broker Partners’) and those who are purely out for a fast buck and will not be a reliable long term business partner. I like the saying, “you can shear a sheep many times but skin it only once”, which is a mantra that some brokers would do well to learn and live by.

How do you develop a relationship with a broker partner? Like finding a wife / girlfriend, I am sure there are many ways to do this. You could throw money at the problem (Russian style) by paying the highest proc fees in the market; you could wine, dine and charm your targets (French style); or you could just market your strengths and try to find a broker who is looking for a lender with this particular strength (let’s call this the approach).

Whilst I don’t believe there are any shortcuts to achieving this particular objective, it is a fundamental one. If you don’t garner strong broker partner relationships, you risk finding yourself used as a stalking horse and only able to execute deals that other lenders don’t want to touch.

4. Ensure execution is stellar

Having targeted your strengths, lined up your funding and found your broker partners, it’s time to do what you said you could do. For example, if you said that you could operate quickly, ensure that you are able to do so (and not just once or twice; every time).

Bridge lending is an industry where high volumes of proposals are received and loans need to be completed efficiently. To ensure that you can execute efficiently you need to have a solid, scalable IT system as well as high quality, trustworthy staff. If you’re a new lender, it’s important therefore to put in the investment into your systems and people upfront - the industry moves too rapidly for you to play catch-up.

Ultimately, efficient execution requires focus, dedication, good systems and quality people. If you have all of this in place you should be in a position to back up your words with action. As our friends at Brightstar Financial said to us recently, “it’s nice to see a lender who can walk the walk, not just talk the talk”. Efficient execution builds the bonds of trust and the foundations for repeat business.

So, the above, in a nutshell, outlines the four key areas that we believe a new bridge lender needs to get right to survive in this competitive market.

The final (unwritten) rule is to try to have a bit of fun - there are plenty of characters in the industry and a lot of interesting stories. Has anyone heard about the lender who tried to repossess a house, only to find that the borrower lived with his pet horse? That’s a story for another time!

Mike Strange
Director, Funding 365 Limited

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