Use One Lender Or Several?

One of the key decisions one has to make in the funding process is not only which lender to use, but once you grow, do you stick with that same lender for future projects, or consider spreading projects across multiple lenders?

Historically, and certainly pre-2008, most developers would say they stuck with one lender (usually a High Street Bank).  This was because it was not only quicker and easier to do so, but because there was little point in assessing competitors.

Small Stable Markets Reduce Need for Change

Why?  Because there were very few competitors and they all charged a similar rate.  Developers were being chased by 3 or 4 virtually identical competitors and lender selection was largely a relationship game.  

Once you’ve then settled on the lender, customer loyalty/apathy sets in, in the same way it does for private retail banking.  Whether you want to change or not, changing banks looks a major hassle and probably not financially or logistically worth doing so.

Larger More Volatile Markets Change the Landscape

However, if you’re suddenly faced with a dramatic increase in competitive options, and realise that the competitive market rates and terms are volatile and can change more frequently, it literally starts paying to constantly analyse the marketplace in more detail (either by yourself or by outsourcing).  

So if you’re thinking about your future funding strategy, growing quickly, or about to offer on multiple sites, a major question to ask is do you stick with one lender that you know, or look at utilising several lenders, some of whom you haven’t done business with before?

Let’s look at some of the pros and cons of using the Single Lender Strategy and the Multi Lender Strategy and summarise after what would be useful to know and consider.

The Single Lender Strategy 

In most Business 2 Business (B2B) relationships, customers will usually say one option and one point of contact is preferable.  It makes life much easier and much quicker by taking up less of your time.  This is certainly an advantage of using just one lender.

Over time there are other advantages.  

• Familiarity, for example, works for both parties.  The application process the second and third time is easier as the lender needs less info to analyse your abilities.  The lender as well, once comfortable with you as borrower, will often offer you better terms than their market standard.  Typically this is on fees and the equity put down but can be on the rate in the lower and higher mid market.
• The same lender also has the ability to cross collateralise current and future lending, meaning if you have one project that has completed but not fully sold out, the lender will often allow you to use some of the equity in the first project to fund the start of the second project in a quicker timeframe than otherwise would have been possible.

So in general, risk for the single lender goes down over time, with speed, time and cost advantages for the borrower emerging as you move through multiple projects.

There are also, though, a number of disadvantages.

Firstly, if you’re not careful, you’re not necessarily staying on top of the rest of the market, particularly if your view is the market isn’t changing, fluid or somewhat volatile in options and costs.  The result is your loyalty over time could also be costing you thousands in unnecessary finance costs. 

Secondly, you can be caught out by lender exposure levels.  Most lenders have a maximum lending exposure per borrower, or maximum exposure per location/region.  I have seen this first hand recently where a developer could not use their current lender because the lender had reached concentration exposure through lending to another borrower in the same area.

Thirdly, there are potential relationship issues by having all your eggs in one basket.  I’m sure many of you have experienced a change in standards when a trusted key contact moves to another lender or retires.  Sometimes the lender has an operational overhaul that changes your customer experience.

So the Single Lender strategy is still a potential play, should you know they remain best in market for you, and the valued customer experience you have with them doesn’t change.  However, with maximum exposure levels and a rapidly expanding, competitive and increasingly efficient lending landscape, it is has become prudent to consider and potentially use the Multi Lender Strategy. 

The Multi-Lender Strategy 

Initially post 2008, this was a concept pretty alien to many.  Why should I spend endless time chasing around after many lenders when the best usually come and fight for my business?

Well as you will all know the landscape changed for the foreseeable back then.  As a result of the large scale withdrawal of High Street Bank lending (reserved now only for the very largest customers with the lowest lending requirements), the market has continued to expand with new private lending operations.  Many of these are substantial in size today with two non High-Street Bank lenders offering up to £100m lending per deal.

With the change in landscape comes the fundamental question: what do I do about all these lenders, and who am I going to use?

Provided you have completed phase 1 (found them all and assessed them correctly), then phase 2 may well be worth trying to use a few.

There are a number of advantages to doing so:

• Firstly, you will have much better experience of what’s on offer in the marketplace once you’ve used a few options.  It’s very hard to understand what the market really offers until you’ve tried them.  We work with borrowers and lenders throughout the build as well as application, and they all vary in their interactions at different parts of that process.   Some lenders for example will be flexible on some of the Conditions Precedent clauses, and some won’t.  Some will be flexible with the use of contingency, and some won’t.  Some lenders offer you one point of contact during the build, and some have 3 or 4 different contacts depending on the issue at hand.  It is often only by going through the whole development cycle with 3 or 4 lenders that you can learn what you like and what you don’t like.
• Secondly, you are in much better position over the medium term to take advantage of the lending marketplace and make better partner decisions.  Whilst building relationships with a number of lenders takes a bit of time, the pay off further down the line is worth it.  It allows you to be nimble should one of your lenders suddenly change their lending policy (which is usually negative for the borrower not positive).  
• Thirdly, you can get back to quick and easy relationships wise.  Once you’ve used multiple lenders more than once, you’re building the same relationships as you would do with a single lender strategy, and it’s not as difficult as it sounds to manage 3 or 4 contacts, particularly if it is through a third party (your true one point of contact!).  
• Fourthly, with any new project it allows you to much more effectively play them off against each other and get the very best terms you can.  If you’re going to a new lender for the first time trying this, then often they don’t try quite as hard as they would if they had lent to you before.

The disadvantages? It takes a little time to work through a few lenders depending on how many projects you have, and how long they will take.  The best case is you have multiple projects starting concurrently and can assess a number of lenders simultaneously, but we all know it rarely works out that way.

Realistically it will take 2-4 years to get a handle on your better lending options, and once out of the other side it will be worth it.

Summary - Multi Lender Strategies Work If You Dedicate Some Time

The decisions we make about who lends to us are usually based around:

• the people we meet and like/dislike
• the flexibility they can offer
• whether they listen to us and try to understand our business
• the strength of the relationship over time
• how they deal with issues as they crop up
• whether you get an easy one point of contact, or are passed from pillar to post

If the marketplace is small and stable, it pays to pick one lender and build familiarity.  If, however, the marketplace is expanding, fluid, and full of differing experiences, it literally pays to use the multi lender strategy.  The depth and nature of the marketplace demands it for most.  It will take a bit more time to get the familiarity and trust we crave as customers, and in the medium term it is worth it.

Food for thought - Questions to Ask Yourself Before Your Next Project

• Should I stick with my tried and tested lender?
• What have they been good at, and what have they been awful at?
• Have they changed their customer experience considerably since we started borrowing with them?
• Have I at least considered a new lender for this project?
• Am I up to date on the current market offerings?
• Am I sure I’m getting the best deal I could get right now?