Top Ten Tips for best practice

Top Ten Tips for best practice

Adam Tyler, Chief Executive of the National Association of Commercial Finance Brokers (NACFB), gives us a series of handy hints for brokers' best practice….




Every week, Adam Tyler, Chief Executive of the National Association of Commercial Finance Brokers (NACFB) gives us a handy hint for brokers’ best practice…

Tip 1: Identifying the correct type of finance

This series of tips is based around the NACFB code of practice and is designed for unregulated advice.

The sales process needs to be as close to a regulated environment without impending on the nature of the commercial deal with its many complex facets. All the procedures adopted at the outset expected in a regulated environment should apply.

The style of advice will depend on the identification of the correct type of finance that the client requires in the initial stages of a deal. This may be a combination of different types of commercial funding that is appropriate to the borrower and their business.

This is fundamental and is where the expertise of the commercial finance broker will set the transaction in the right direction from the outset. We will cover more on this next week.

Tip 2: Never assume!

The lead has arrived; the customer knows he needs to borrow to help his business grow. The finance he thinks he needs may not be the finance that is actually right for his business. This is another area where an experienced commercial finance broker can help. Although the business owner may think that he needs a loan to buy a piece of equipment, or an overdraft facility to help with the cash flow, a good broker will explore all the finance options with them and find the best deal for that business. For example, instead of a choosing a business loan to buy equipment, a broker might recommend a leasing arrangement as more suitable. Perhaps instead of a traditional overdraft, the flexibility of a factoring arrangement could give a business the cash injection it needs.

There are many scenarios where a trading business, may need a number of different types of Commercial Finance, perhaps a Commercial Mortgage for the property, leasing or asset finance for the equipment within the business, factoring or invoicing discounting for any debtor finance, and perhaps even vehicle finance to cover a fleet of cars or vans.

An analysis of all the debts in a business is not only the start of giving the right advice; it also ensures customer confidence so that they continue to use the same broker for years to come.

Tip 3: What Fact Find?

Some may wonder how such a place exists in this ultra-regulated environment, but it does. Business owners are considered to be sophisticated borrowers, and they are. They run their own business so should be able to read a set of accounts, make business decisions and deal with all the complications of being self-employed.

This is why we do not need the full onslaught of regulation in the commercial finance industry, and this is why there is no need to complete a fact find before advising on a suitable type of finance. But to ignore that process completely would be foolhardy, a broker needs to understand how a business operates, what it has in place now and what its plans are for the future. What does happen is that all this information, along with basic and personal details, is collated and kept, but in a variety of ways. This does not need to be prescriptive, but concise enough to provide an audit trail of advice. KYC must be followed and even though sometimes they do not realise it, commercial finance brokers are completing their own fact finds.

Tip 4: Commercial fee disclosure

At a first customer meeting or when arranging commercial finance over the phone, a Terms of Business Agreement needs to be signed. This must outline the fees that any SME can expect to have to pay the broker for the arrangement of any commercial finance.

The standard NACFB TBA has been used for many years, standing the test of time and also numerous court cases when a dispute over fees has arisen with the customer. This document, available to all Association Members, is as necessary in a commercial transaction as it would be for a regulated contract. The Hurstanger v Wilson case in 2007 highlighted the need for fee disclosure in any transaction which applies to the lender as well and is now evident from most commercial lenders.

The NACFB TBA shows three fees that the customer could face, any arrangement fee to be paid to the broker for his time, the share of any lender arrangement fee that the broker may receive and possibly an appraisal fee. When these fees are due to be paid during the transaction must also be disclosed.

It is the latter that may need to be charged to assess a commercial case, this allows for the brokers time before he can judge if the case can be placed. Advance fees can be problematic and form a major part of the Association's policing of the Commercial Finance industry. This fee must be realistic and appropriate and we advise that in the majority of cases will never exceed £500 for even the most complex cases, and most of the time will be far less than this.

Tip 5: Getting the right information

The days of a name and telephone number should be long gone and I implore any commercial lender who is offered just this by a broker to refuse to accept it. Not only refuse to accept that lead, but any subsequent business in the future.

There is enough commercial finance business, no let me change that, there is enough GOOD commercial finance business, which no lender needs his BDM to have to do all the work. At the same time a good broker should be able to prepare a case for lender in such a manner that the lenders BDM, can virtually rubber stamp and put straight to credit.

These are conversations that we at the NACFB have on a regular basis with our lenders, who do not want their BDM or credit departments chasing for information - the broker is being paid to add to the transaction. In the future, if we as commercial finance brokers want to be able to introduce business, we need to continue to add value, exactly as the good ones do at the moment.

Prepare the case as the lender or funder wants to see it, present it with your report, (see next tip) and your deals, if your introductions done in the right way, will find their way to the top of the underwriters pile every time.

Tip 6: Presenting the case

It is not uncommon for a commercial finance broker to place a case successfully with a lender that has already turned down the same applicant. In some cases this has been with the borrower’s own commercial bank.

So, how does this happen?

It is simply about the presentation of a case. Good commercial finance brokers know what an underwriter wants to see – the full details of the deal. The gathering of accounts, forecasts, ID and credit checks, to name but a few are all expected, but it is the accompanying report that pulls it all together. At one of our recent events, a representative from a High Street bank was explaining exactly what they wanted and referred to something that may be currently out of fashion - CAMPARI.

Whether this mnemonic is one that is currently in favour or not, the information contained in the report still needs to follow this logic. The lender needs to understand the character of the borrower – do they have the ability to run the business and how they propose to do it?

If the need for the borrowing is explained, the amount required is clear, and the means to repay the loan is established, then it will help the decision-maker see the wood from the trees.

Finally, if all other elements are in place around the proposed loan, then an underwriter is always going to favour a clear application and look out for that particular broker next time.

Tip 7: Choosing the right lender

There are five High Street banks, all are in the UK SME market in varying degrees – but that is not up for debate today. What is, is the range of lenders and funders in the UK market to choose from. The NACFB works with 75, who are patrons of the Association, and these range from the High Street banks through to specialist niche lenders.

Of course by this stage, we know whether we need a factor, a lessor, a conventional commercial mortgage etc, so it is a choice from within each specialist area. We are now down to not only industry knowledge, but we are further complicated by the number of lenders panels we are on.

This is of course a difficulty for the NACFB as it is only right that all our members should work with all our Patrons. But reality tells us that some just do not have the infrastructure to cope and others choose to work with a selected number who give them the right volume and quality of business. So choice for the broker is not only determined by the needs of the customer, but what access they have to commercial finance providers. It is easier to have a wider panel the longer you have been in the market and of course it is easier to access lenders and funders if you are a member of the NACFB.

Tip 8: Getting it through

This particular week is not rocket science; we all know what we have to do here. But it is important because if the broker steps back here, then my final tip next week on getting paid will become an issue.

The main comment here is all about communication and being of added value in the process. This comes in varying degrees and is heavily dependent on the type of finance involved – there is not a one size fits all scenario. For example, an asset finance broker will know the client, know the funder, know the market, but will not need to meet the customer. The deal will go through quickly, if it is straightforward and will be completed in a fraction of the time of a property transaction.

So, how far will the broker need to be involved? Not much after the placing and introduction. Unlike a property transaction, where a number of other parties are involved combined with a convoluted legal process. It is here that hands on intervention certainly can mean the difference between success and failure.

Tip 9: Getting paid

As the NACFB members and their transactions fall outside the remit of the NACFB, part of our Code of Practice is dedicated to a complaints procedure. We receive details of complaints from the Financial Ombudsman Service to deal with those that are not in the scope of their investigations.

Therefore, I can see where our brokers may have slipped up, which I am pleased to say is very infrequently. But when they do, it is invariably around fees and how much they do or do not want to pay. As I said last week, if a broker gets this part right, then disputes do not happen. The business customer wants value for money and as the fees can appear to be quite high, they really do need to see the added value to the transaction.

The NACFB Terms of Business Agreement has stood the test of time and a number of court cases, where our members have had dispute with their customers. Of course commission paid by the lenders and funders is equally important; the customer will know that you are being paid for your work, so justification is just as essential to ensure you successfully receive your due reward.

Tip 10: Education & Networking

In order to maintain high standards of practice in a market that is continually evolving, attending workshops, educational seminars and networking events provide a great opportunity for brokers to continue to offer the very best service to those requiring commercial finance.

Every year, the NACFB holds a number of events specifically for this purpose.

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