Since starting my role at Whiterock Finance, I have caught up with many contacts and often as I have gone on to explain what my new role entails, I can sense the unasked question from many… why would a client pay me to find the debt when they could just find it themselves…?
Historically banks took deposits from thousands of people with spare cash and lent it to businesses to fund their growth. It would not have been practical for business to seek out those people directly, so the banks acted as intermediaries. The difference between what the bank paid their depositors and what they charged their borrowers was how they made their money.
Many businesses in Northern Ireland had a cradle to grave relationship with a single bank. But times have changed, and in the financial crisis banks’ appetite for risk changed which left many business customers looking for funding that may not have been as readily available from traditional sources. Thankfully the financial crisis also saw the development of many alternative funders, both finance companies and HNW individuals.
It can be a challenge for businesses to seek out the many options available and that’s where brokers come in. It could be said that never has the broker role been more important, not just to find a willing funder but to find the right funder. This requires a broker who understands business and not just an order taker who emails a proposition to an address book of potential funders hoping to get a hit.
Our approach is simple – to find a debt provider who can offer a funding solution to meet the specific needs of our clients. Sometimes the key is finding that debt at the lowest cost or in the quickest time, sometimes it is finding a funder with appetite for higher risk propositions, and sometimes it is finding someone that can provide the flexible funding solution a client needs without attaching a range of onerous conditions and covenants.
Yes, most of our clients can approach high street banks and maybe even now one or two alternative funders who are becoming more well-known and visible in the market. So, what can we possibly add on top of that to justify our fee?
Often the answer is simply ‘options!’. Our job is to use our relationships with funders based in both NI and GB to add value by suggesting funders our clients haven’t already approached, funders they haven’t heard of, and more importantly funders who are active in their particular space and eager to lend!
As well as options we give our clients back time, which is so often scarce these days. Looking for funding partners, sharing information, answering questions and managing the process with a chosen funder is without exception a time consuming process. Many of our clients appreciate the cost benefit rationale of paying a broker to manage that process and allowing their team to focus instead on finding the next site, getting deals over the line or simply running the business.
The biggest misconception is around the level of additional cost of including a broker in the debt raising process. Yes, there is a fee attached as with any service provided, but the majority of that fee is success based which means first off, there is no downside to engaging with a broker – if they don’t find what you need, it often costs you nothing. If they do come up with some value adding options you can weigh the proposition up, including the broker fee, before formally engaging in the process. But you never know, they could just introduce you to someone who goes on to be a long term and supportive funding partner for your business for years to come which would most certainly make that additional fee payment worthwhile!
Taking that to the next step, particularly when dealing with alternative funders, you will often find that going directly to that funder might see you incur an arrangement fee of say 2% on the debt raised. Going through a broker, and weighing up multiple options, if you still end up with that same provider you will often still pay that same 2% fee – such is the generally accepted practice of many alternative lenders who are used to dealing with brokers – they will take 1% and the broker gets the other 1%, overall costing the client nothing additional!
While we have brokered many deals that have seen funding come from local financial institutions and challenger banks, often clients find particular benefit in engaging with us when traditional bank appetite is not apparent, and as such it is alternative finance (which arguably now is becoming more mainstream finance!) that is required which is where clients tend to have a smaller pool of direct options. At the start of any such discussions, the reluctance to go with an alternative funder is always driven by one thing… the higher cost of the debt! However, you need to weigh up the cost of paying 6%, 7%, 8% from the alternative funder vs paying 3%, 4%, 5% from a bank who is unwilling to provide the funding you need if their appetite doesn’t align to the proposal under review. Furthermore, while banks certainly continue to have their place in the funding stack and continue to be our first port of call for clients where appetite allows, often the alternative finance providers will roll up their arrangement fees meaning from a day 1 cashflow perspective going with an alternative funder can actually have a cashflow benefit! Add to that the typical turnaround speed of the alternative funders which means projects can typically commence quicker, the overall cost of capital difference is often not as stark as first imagined and works particularly well for bridging loans or shorter term development projects.
Hopefully that has given you some food for thought as to what this whole broker role is all about. If you or your clients would like to chat further around the role of the broker, think we could add value to your current funding discussions, or even just to put us to the test to see what we can come up with, feel free to get in touch with Clare Stokes (firstname.lastname@example.org) or Ryan Murphy (email@example.com) at any stage.