Whether something is good or bad will depend on the lenses you are looking through. One man’s trash is another man’s treasure. Likewise, what is good for a borrower may not be good for a lender and vice versa. We examine both below.
From a Borrower’s perspective, the UK bridging market is sophisticated, efficient, competitive and mature. We do not know of another market globally that offers such a wide variety of options in this particular segment of the lending market. Borrowers are being well served. But why? Open banking, technology, availability of capital, technical expertise and a healthy entrepreneurial appetite have all contributed to the wider market. Go back 20 years, and the bridging market was largely focused on a small number of high street lenders and specialists who were delivering financing solutions, often to borrowers in some distress. Bridging was not seen as a mainstream lending solution, and there was limited appetite from the incumbents to travel materially up the risk curve. The requirement for the solutions probably always existed, but the incentive didn’t exist to solve the problem.
There was not a great deal of innovation in the space until 2005, when the early adopters noticed a market ripe for change. A market like this, ripe for disruption, needed other conditions to be present. It needed the technology to catch up to make the new businesses economic and crucial, giving them an advantage over the incumbents. This gradually became common, and now, the new lenders have a significant operational advantage over the traditional lenders thanks to new technology and no legacy systems. Slick operational models allow businesses to focus on the core function of the business.
Once the market saw a few of these new lenders spring up, a very low interest rate environment began in earnest in 2008/9 following the Great Recession. This drove a wall of capital towards the space and gave entrepreneurs the confidence to set up new lending businesses. Were there some casualties early on? Yes. Many businesses built shiny new technology platforms but had limited credit experience or no origination capability. There were some failures, but even they have contributed to the market we find today. On the other hand, there are some fantastic lenders in this space who we admire deeply. They have learned the lessons of the past and have the correct blend of technology and credit experience.
From a lending perspective, the view is perhaps a little more circumspect. As a lender, we think you are expected to do a few things as a minimum. These include providing a great service, being honest, moving quickly, being efficient, and lending at a fair price and a few others. So how does a lender in this space distinguish itself from the many other options a borrower has? Relationships, of course, are important. Funding mix is important. Credit work is vital. In our opinion, lenders live or die on the strength of their origination capability. If you cannot originate loans at a reasonable cost per transaction, there is an inevitability to the road a lender will travel.
Lenders must build a reputation that can deliver high levels of technical expertise on the credit, diverse and deep funding mix and a broad and consistent origination funnel. This is not easy in a highly competitive market. The knock on effect of this can lead some lenders to participate in a race to the bottom, i.e. driving rates lower and lower. This is a false economy and, in the long run, will be negative for all market participants. This may plug gaps in the short term, but it will eventually undermine the funding potential of the business and, in time, reduce the number of participants in the market.
In summary, Lenders must work very hard to differentiate themselves in an increasingly competitive marketplace. The competition makes the proposition extremely attractive for borrowers.