Top tips to navigate private lending in the wake of cheap money fused with low credit integrity.
I was recently involved in a round-table with Andrew Way (Semper), Nick Samios (Hermes Capital), Andrew Moulds (Head of Asset Finance, Lend) and non-bank specialist and strategist, Alex Brgudac, where we had extensive discussions about the effect of quantitative easing, and how the abundance of ‘cheap money’, fused with low credit integrity, is driving a spike of new private lenders.
It makes sense at face value: if you’re putting the money in the bank, you’re getting a 1 per cent return, at best. If you put it out in private lending, you’re getting 5.5 per cent or 6.5 per cent on a good deal.
However, the problem is that a lot of the people who are now putting out this money don’t necessarily understand the basic mechanics of lending or rate for risk benchmarking – i.e. what goes into a good deal, how to package it up, and what red flags to look for.
On this note, right now, I’m seeing so many bad deals that I pass on. They don’t have a strong exit, or the asset is overpriced. They are the deals that I walk away from, but they are still getting written.
The fall out from this attitude of “I must get money out the door” won’t be seen for the next 12-18 months, but there will be a lot of lenders needing to take some losses, and they don’t have the balance sheet to absorb it. As Andrew Way appropriately states: “Badly lent money stays ‘lent,’ becoming a gift that no-one benefits from.”
Here are my top tips for brokers navigating the current private lending landscape:
Why reputation trumps rate
Reputation beats rate every day of the week. I’ve got a core group of financiers that I’ll use to fund my deals. They’re reputable. They’ve got good credit skills. They’re not afraid to say ‘no’ to the deal. If a lender is going to say ‘yes’ to every deal I put in front of them, it’s a bad lender.
When I’m looking at new lenders, I’ll search them on the web. If I can’t find a website, or if I can’t find them on LinkedIn, or if I can’t find a phone number for them, those are all red flags. If all they’ve got is a one-page landing page, it’s probably not someone that I’m going to be looking to do some deals with.
While it sounds counterintuitive, the lenders that are happy to say ‘no’ to the deal are worth more to me than the ones that will say ‘yes’ to everything. This is because I know they’re looking at the deal and looking through it. They’re looking at the borrower; they want to talk to the borrower and check that everything stacks up before they make a decision.
Give advice (even if it’s not what your client wants to hear)
SMEs should be cutting through the policy and the rhetoric and focusing on the long game. They should be building a war chest to take advantage of the opportunities that will surely come along as things begin to unravel. This comes from good advice from good brokers that know the space and are not afraid to give the advice that nobody wants to hear.
The golden rule
Inflated asset prices, and bad debts that come with it, have the opportunity to send good businesses to the wall if they over-borrow in the current environment.
We have a basic rule: don’t ever put a client into a loan you cant get them out of. Unfortunately, that is not the case across the board, and there are plenty of brokers and lenders that will just take the deal for a fee.
Invest, Invest, Invest
Invest in clients, invest in extending referral partnerships, and invest in upskilling. This is the time to NOT be a transactional broker.
Manage your clients and the relationship, and the rewards will come.