The traffic light system in owner-occupied commercial lending slammed as 'utter nonsense'



623_2021-07-01-09-29-00am.gif
Last week, Bridging & Commercial partnered with Allica Bank in a live event to discuss the underserved owner-occupied trading business sector.

As part of its weekly virtual roundtable series, Medianett’s managing director, Caron Schreuder, along with Charissa Chang and Nick Baker, business development manager and managing director of intermediaries at Allica Bank respectively, hosted an hour-long discussion that centred on supporting SMEs’ requirement for commercial mortgages as they attempt to recover and grow post-pandemic.

The panel also included Chris Richards, regional manager for the North West at Newable Finance; Emma Vanson, senior associate at Sirius Property Finance; Tom Clark, director at Napex Finance; and Paul Mak, managing director at Pomegranate Commercial Finance.

Nick began by explaining the general lack of appetite in the commercial lending market for these types of businesses. 

“Few lenders have a dedicated proposition that supports the owner that operates in their premises,” he said, pointing to the market dislocation of the bigger banks, which used to be the go-to for this type of finance, but have further reduced their willingness to lend — even pre-Covid. 

“A lot of those lenders’ focus has been on other areas, such as CBILS and BBLs.”

He went on to detail a “traffic light” system commonly applied by lenders to certain parts of the owner-occupied market, effectively vetoing or giving the green light to whole swathes of the sector. 

“It’s utter nonsense,” Nick stated, “there are good businesses in every single market.”

While Chris noted that the traffic light system has been applied to less hardy sectors, as a result of Covid, he implored lenders to temper their appetite, rather than pull out of entire parts of the market. 

Instead, he suggested that finance providers might require a bigger cash stake or to be repaid quickly, or want a certain level of experience or a PG. “It’s this, 'We just don’t do that at the moment,' and then, in six months, [they might] switch it back on again. That, for me, is the biggest problem,” he commented.

Nick believes the problem could become worse in the coming months; he is witnessing finance providers reducing their exposure when commercial facilities are coming up for renewal. This means that not only is there a lack of support for new borrowing businesses, but the existing market will also feel the squeeze. 

Tom mentioned that “good businesses which, 24 months ago, would qualify for high street criteria”, but that have since taken out BBLs — a relatively cheap form of debt — are having this count against them and seen as an indicator of having been “in trouble”. 

“Why would you pay want to repay those loans if you can comfortably afford to [service] that debt?” he asked.

It is also difficult to secure funding for hospitality and care homes, according to Emma, especially for less experienced operators. She noted that financiers were starting to consider pre-Covid financial information, how the business coped during the pandemic, and its performance since, which she said was “very helpful”.

Charissa agreed: “That is the common-sense approach that lenders need to be taking,” she said, detailing that a demonstrable strategy of how a business is or intends to recover needed to form part of the whole picture.

In Paul’s experience, high street providers are currently occupied with dealing with their existing clients and often turning away new business. 

Also impacting this sector are lenders “stripping out” council grants — which many leisure businesses received during the pandemic — when considering affordability, effectively making it untenable on paper and “killing the deal from day one,” claimed Paul. 

Nick urged brokers to piece together the real profitability of the business, taking into account things like furlough, insurance and grants. 

He feels that there is a “distinct shortage” of experienced underwriters who are focused on trading businesses and have been through a cycle before. “Frankly, Allica is not big enough to solve the challenge,” he admitted. “But the broker market is.” 

The full virtual roundtable can be watched below:

Leave a comment