For UK asset finance brokers, the
global economic slowdown is having a significant effect on their
daily business. Business for some brokers is drying up as lenders
refuse to take new business from them, broker commissions are
dropping, turnaround times are getting longer… The list of
difficulties they face go on and on.
The scale of their problems was neatly
summed up last month by Adam Tyler, chief executive of the National
Association of Commercial Finance Brokers: “Most are hanging on to
their existence and living on their fat. Many younger brokers,
especially those with mortgages and families to feed, are quitting
the industry and looking for steadier jobs.”
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Asset sector hit
The hit to the asset finance
brokerage market comes hard on the heels of a downturn in the motor
finance broker sector, which saw non-prime lenders such as Park
Finance, Welcome Finance, Blue Motor Finance and British Credit
Trust either exiting the market, or curtailing their services and
commission levels.
Last month it emerged that Barclays,
Universal Leasing, CIT, Lombard, Davenham Group, Bibby Leasing,
Grenkeleasing, and Heritable Asset Finance had either stopped
financing deals from brokers, or reduced the amounts they are
willing to take from them.
Vendor finance schemes are tightening
and making life harder for vendors who are already struggling to
sell more products, while larger-ticket business is also under
pressure. Bank of Scotland, for example, has restricted lending to
a maximum of £50,000 and has also tightened up on underwriting.
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By GlobalDataIncreasingly funders are reducing the
commissions they pay their brokers.
According to Graham Hill, chief
executive of Automotive Finance, they are now one-third of what
they were before the economic slowdown.
“A broker could take up to 60 percent
of charges when placing business with Hitachi Credit – but this has
now been reduced to 40 percent,” he said.
As lessors face up to their own
problems, they are pulling no punches when it comes to informing
their brokers about future business.
Many broker arrangements have been
summarily terminated with the minimum of warning. Simon Barrett,
the managing director of Barrett-Lee, a well established East
Anglian broker, received an email from Lombard announcing that it
was generally reviewing its broker connections, and a later one to
the effect that from 30 November no further deals would be accepted
from Barrett-Lee.
Increasing turnaround times
Meanwhile, where funders are
still accepting some business from brokers, deal turnaround times
are increasing.
“Decisions,” Hill said, “are taking
much longer, and when the decision is eventually made, it often
seems illogical.”
Simon Barrett agreed: “There is a
crucial lack of certainty about underwriting requirements which
seem to change from day to day. It is not possible to create a
business plan at the present time.”
A sector particularly affected by the
turmoil is SMEs. The current volume of asset-finance proposals is
likely to slow as businesses defer spending and expansion as bank
caution radiates through the economy.
“Banks are definitely more cautious.
Transactions that would easily have attracted funding only six
months ago are being turned down,” one broker says.
“We regularly find ourselves having to
coach and cajole lenders into taking positive attitudes to good
lending opportunities.”
Unsurprisingly, increasingly
frustrated brokers are accusing lenders of poor practices, and
pointing to these as the cause for the current shortage of
work.
One broker claimed banks’
decision-making processes are “riddled with fundamental flaws” that
often lead to poor quality or incorrect decisions being made.
“It isn’t true, in the majority of
cases, that banks remove the umbrella when it starts to rain,” he
said.
“The problem can often be traced back
to the original lending decision where the bank, and/or the
borrower, did not fully understand what they were agreeing to do.
It is possible to negotiate with bank funders and get a sensible
outcome so long as the borrower, or the broker acting for them,
knows what they are doing.”
Brokers also accuse lenders of, in the
words of one broker, “continuously moving the goalposts”.
“Some brokers complain that after
preparing a case and presenting it to their usual lender, they
often receive a response to the effect that the lender no longer
deals in such assets – or indeed that sector,” said Hill.
“Better communication between lenders
and brokers would help greatly.”
Life has also not been made
easier for brokers as lenders have increased the rates they demand
from end-user customers. Whereas for blue-chip customers a flat
rate of 5 percent was until recently readily available, the rate
now is more likely to be around 7 percent – and rising. With the
increasing wariness of new start-ups, a 10 percent per annum rate
is more likely to be applied.
Rising rates
Barrett said overall rates are up by
about 50 basis points in recent months, while Vineesh Madaan,
Bluestone Leasing’s chief executive, which has around 7,500 lessees
on its books, believes that the “slight increase” in fraudulent
deals that are appearing on the scene are also driving lenders to
greater caution.
One intermediary in the hospitality
and leisure sectors said: “When recently looking for loan finance
for a client in Southern England I was offered a £6 million
facility by a major bank at 1.65 percent over bank base.
“It then sought to change this to
encompass the whole of the company’s borrowing (which was around
£20 million) but was then only prepared to offer some 2 percent
over LIBOR. My client declined the offer.”
He added: “We are finding new
borrowing difficult, but not impossible. Rates are higher and
equity must be greater.”
The NACFB was established some 15
years ago largely to combat advance fees among brokers.
The current economic climate has led
some lenders to demand large amounts of cash, for no guarantee of
any kind of service, from clients who are vulnerable because they
are quite desperate for some kind of financial assistance.Things
are not all bleak. Some large lenders, including ING Lease and
Siemens Financial Services, are still accepting broker
business.
Also, according to Madaan, “demand is
still good in the marketplace”, although he added “vendor
relationships need constant appraisal. The majority of our
remaining funders are keeping us abreast of their policy changes –
and overall relationships remain good.”
Sales finance is also holding up. “I
believe,” said Tyler, “that it is no coincidence that in a
contracted market, brokers are having to diversify, and invoice
finance is one of the few areas which is still relatively
unaffected by the downturn.”
Brokers are also not taking their
current problems on the chin. William Flateau, who owns First
Finance, has decided to give his colleagues at the NACFB a chance
to air their grievances. He has established a blog website,
lendertracking.org, in a campaign “to persuade banks to lend again
to businesses in the UK”.
He believes that pressure from UK
brokers acting together will help get the market moving.
He outlined: “The website has a forum
for brokers to ‘tell their stories’ – anonymously if they wish – to
find out what is really happening in the commercial world. Just a
week into launch with 500 visitors to the site, there is a
groundswell of support for the campaign.”
Looking to the future
But not all brokers are sweating.
Graham Wall, director of Quartz Finance, commented: “The funders we
work with are fully supportive and excellent relationships are
being maintained. Spreads are increasing and some funders are
charging a liquidity premium.
“Leasing companies still have to
do business. Nevertheless, some funders have withdrawn from the
market, some are pricing themselves out and others are on hold
until 2009.”
Meanwhile, Allan Ross, managing
director at First Independent Finance, said that more mature
funders are adopting a “back-to-basics approach”.
“That is needed, and we fully support
it,” he added. “The market needs care and caution if we are all to
come out of this difficult period in good health.
“Some may describe it as ‘increased
bureaucracy and controls’ – but it is no different to the
fundamental and prudent underwriting procedures that historically
served the industry well.”
Ross even sees opportunities for the
future, and said: “The effect of the recent market changes is that
people are seeking to move from paying for assets using their
overdraft to using asset finance because it makes more sense.
“Businesses have been forced to
re-evaluate their approach to medium-term debt. And that represents
opportunity for asset lenders and brokers who often forge closer
and longer lasting relationships with their customers.”
None of this should detract from the
fact that the UK asset finance broker market is under siege.
Tyler believes that, of his
association’s 1,400 members, some 30 percent could be at risk of
going out of business during 2009. Admittedly, many of these will
be in the mortgage sector.
Apart from NACFB members, there are
estimated to be around 1,000 brokers operating independently of the
association around the country.
Many of these operate on a strictly
local basis with restricted funding lines and often near the margin
of profitability. It is probable that many of these operations will
be significantly reduced over coming months – or go out of
business.
On the flipside, demand from customers
is still high, although, of course, this might not last forever as
the impact of the recession sharpens in the new year.
Brokers, too, are an important
resource for lessors, and the likes of ING Lease, which continue to
source business from independents, may well come out of the
downturn stronger than those of its competitors, who closed off
broker funding lines.
