Nick Oakley, Head of Lending of CapitalRise, the online property finance marketplace that connects established prime residential real estate developers with a range of investors, explores how the lending landscape has shifted and why the long established ‘cookie cutter’ process is no longer fit for purpose, especially in development finance.
In the last 10 years, the business world has undergone irrevocable changes. Technological innovation has given rise to the ‘gig economy’ and transformed everything from the way we interact and communicate to how we shop. But one key facet for businesses of all sizes – lending – has also transitioned, with the ‘cookie cutter’ approach no longer able to meet the demands of today’s businesses. Here, we’ll explore how and why the lending landscape has changed so much and why the one size fits all approach once desired by lenders in their drive for efficiency and economies of scale, is simply not viable in today’s world.
The ‘cookie cutter’ - tick box approach to lending was for a long time the mainstream source of financing for businesses. Loan applicants needed to conform to the mainstream banks’ inflexible terms, without much thought given towards the applicant’s business needs and how the loan could be structured and personalised to the benefit of all parties. However, with the rise of new lenders, the landscape has undergone a paradigm shift.
From our perspective, it is important to recognise how we got here and why specialist lenders have come to the fore. Many pinpoint the financial crisis in 2008 as the catalyst behind this change, which is of course is a part of the story. However, in our view what we’ve witnessed is a sea change, as lending from established players dried up the shift towards a more tailored lending approach, utilising alternative sources of capital is also reflective of the UK financial services industry as a whole, in seeking new ways to support underserved areas of the market.
This move away from the tick box approach was not so much a return to the bank manager with a personal lending discretion; but more a return to the personal touch – putting emphasis on meeting the borrower, visiting the subject properties and sites and building trust and confidence between borrower and lender. In many ways, this marks a return to the old school ‘canons of lending’, character; ability; purposes; means. An approach that in turn gives comfort that all parties are trustworthy and reliable to work with over the life of the lending facility.
Clearly, different businesses have different financing needs. For example, a fledgling tech start-up will need to meet capital intensive set up costs, whilst an established manufacturer may need financing to alleviate late invoice payments. Likewise, our focus within the real estate sector has its own sector-specific financial issues and from our point of view and experience, quality of service and bespoke solutions for developers of all shapes and sizes is something the market has lacked for some time.
Whilst we see that automation and tools such as AI bring huge advantage, particularly with regard to speed, from our perspective this should be no substitute for skill and experience, not least in the prime residential market where we operate. In our sector, everything from the location of the development and the developer’s track record, to the fundamental build quality are assessed by genuine specialists, something high street banks no longer have the capacity to do. Furthermore, this process means that those who are not eligible for a loan receive detailed feedback as to why they haven’t been successful, rather than a vague and unhelpful explanation as might have been the case from their bank.
As a lender, we evaluate every deal on its own individual merit – there is simply no room for off the shelf solutions in our business and despite this we have still declined over £1.8M of business in the last six months. For example, we are highly selective when it comes to progressing loan applications and seek to be as pragmatic as we are can for a given situation. In our experience, when a known location isn’t right for a particular project, or the cost of a build is unequivocally low, there is simply no value in pursuing a case any further.
Furthermore, we only lend to developers who have significant experience and a consistent, proven track record of profitable financial performance which we believe provide a high probability of success in the future. Only once we are satisfied, we progress with tailoring the loan specifically to the developer and it’s only after this stage that we offer this opportunity out to our members to invest in, via our online platform.
Overall, we think the market has changed for the better. Innovation has made within the market ultimately benefits the customer and new entrants have forced traditional players to up their game. In our view, this leaves the market a much better place than it used to be.