Since the financial crisis way back in 2008, traditional lenders such as banks have become far more risk adverse when it comes to lending and bespoke financing.
With the risk now perceived as higher, combined with legislative restrictions being implemented, this did leave a void in the lending market. However, banks have begun to make a U-turn.
With the range in alternative lenders such as FJP Investment offering instruments such as loan notes, this proving to be very attractive with investors, banks have begun offering a range of bespoke financing.
What is bespoke financing?
Many people have a negative view of the bespoke financing market, with 70% of the market being owned by the “big six” banks. Whilst there is evidently something of a monopoly in the market, it is very different than a traditional loan or mortgage.
Bespoke financing in a nutshell is personalising the structure of the loan to the client. Not just a case of throwing a generic loan repayment at a client, the loan repayment is structured based, generally, on the clients expected ability to repay the loan over time. This is particularly important when considering the loans are often used for redeveloping property or using the funds for different investments.
Why bespoke financing is important
The biggest reason for the benefit of bespoke financing is more due to the flaws in traditional mortgage lending. Most find it difficult to obtain the funding needed to get onto the property ladder.
Traditional mortgage lenders focus almost exclusively on cash flow over anything else, and with limited cash flow, irrespective of significant assets under possession, clients find it difficult to secure a conventional mortgage.
Private banks and lenders do not operate under the same restrictions as high street banks, thus can take more of a logical approach to this. Taking into account current assets, current and future cash flows and other future prospects gives many justifiable access to finance in a way that everybody wins.
This also helps to mitigate the sale of assets for clients too. Many assets will be better off in the long term being held, and it provides those with the opportunity to invest in profitable projects and have limited liquidity. This results in higher levels of security for lenders to enhance for levels of funding that traditional lenders would not be able to satisfy.
Other services of bespoke finance
Private banks offer highly competitive mortgage rates in exchange for the transferral of investments being directed toward their asset management division. Consider this a type of insurance policy against any future funding, though clients do retain the right to have full access to relevant income streams from their investment portfolio.
There have been occasions in the past where income from the investment portfolio contributes massively, in a positive light toward mortgage interest charges.
Private banks will therefore have additional assets under management when compared to high street lenders, but also a relationship with a new client will be tailored to their needs, thus very likely stronger. Receiving competitive personalised rates on loans and mortgages will be essential for individuals going forward.
As well as bespoke finance, we are seeing a large number of individuals seek alternative finance over finance obtained through a high street bank. On the topic of property, property developers are continually turning to alternative sources of finance, one such example is that of loan note investments.
Loan note investments are simple. Investors loan money to property developers in exchange for their capital back after a pre-determined amount of time, plus a fixed rate of interest. Investors benefit here obviously, but so too do property developers.
With high street banks no longer funding those with low levels of cash flow, developers are finding it difficult to source the funding to kickstart the development project. With a critical shortage of housing across the UK, developers can satisfy a fundamental need for the public, and investors not only make a profit but support this need for additional housing.
For many years, private banks and alternative lenders have been something of a mystery to investors. However, these private lenders are stepping forward to provide clients and investors a much-needed source of finance, and an alternative but secure way to grow their finances.
With a growing number of investors focusing on finding alternative ways to grow their money, this trend is also something that is very likely to continue going forward, as traditional investments in stocks and bonds experience a small drop in activity.
Most will continue to specialise with high net worth individuals on both fronts, but the services provided offer more to a greater range of clients, and this is increasingly becoming public knowledge.
Approaching the right lender will encourage good, honest competition in the field, with safeguards being implemented will also ensure that all parties are protected in this entire process, such as placing a charge over the assets. This method of raising finance is truly a win-win for all parties involved and we expect to see a lot more of this type of investing going forward.