More and more, traditional lending is falling short of the demands and needs of SMEs, with slow processes and rigid systems. This has allowed private lending to enter the market to fill a required gap, creating a wealth of opportunity for brokers and their SME clients.
While private lending is a welcomed and needed solution for SMEs, it’s important to be aware that not all private lenders are the same. Given the crucial role brokers play in connecting clients with lending solutions, it’s vital that they do their due diligence when it comes to selecting and working with a suitable private lender.
Demand for alternative lending solutions will only continue to rise as regulations further restrict banks. This leaves brokers with the challenge of navigating a diverse market of private lenders all offering flexibility and tailored structures.
So, what should brokers look out for?
There are more common areas such as ensuring the lending solutions best suit your clients’ needs and the reputation of the private lender. However, what else should brokers consider, especially when it comes to safeguarding against unexpected pitfalls or unwelcome surprises?
Lender reputation and track record
Brokers should take the time to research a private lender’s reputation in the industry and track record, specifically their success rate when it comes to past deals and client satisfaction. This will help a broker feel confident that they are aligning their clients with lenders that have a solid standing and are a trusted lender in the market.
Loan terms and conditions
Brokers should carefully review the terms and conditions of loans offered by the private lender. This will ensure that there are no hidden fees or clauses that will be passed down to the client, and the standard terms are suited to your client’s needs.
Transparency and communication
Brokers should keep an eye on how transparent private lenders are then it comes to lending processes, risks, and terms. Of equal importance is to examine how responsive and communicative the private lender is. How do lenders communicate with borrowers? Is the lender taking the time to ensure the borrower understands the loan processes and terms? Communication and transparency are key factors that will help foster trust in the lender.
Regulatory compliance
Going back to basics, brokers need to ensure that the private lender adheres to financial regulations and licensing requirements.
Type of security
Brokers should assess the types of security that the private lender accepts.
Interest rates and costs
Brokers should have a full understanding of the interest rates and any associated costs in the loan. Compare rates between private lenders, look at industry benchmarks, and be sure to understand all of the costs involved. This will help you feel secure in the private lender and can confidently recommend them to your client.
Flexibility and tailored solutions
Brokers should be asking private lenders about how flexible they are and the adaptability of their loan structures. Not all SME clients are the same, so brokers seek private lenders who tailor their lending solutions based on their client’s needs.
Client references
Brokers should be asking for client references from the lender. This helps the broker to gain valuable insight into how the lender works with borrowers, their track record, and their experience and expertise. What brokers want to see is a track record of happy clients.
Exit strategies
Brokers would want to see the range of exit strategies available to clients that the lender provides. This includes determining how flexible the lender is and how the lender manages factors such as refinancing or early repayment.
Conclusion
This due diligence checklist provides the foundation for what brokers should be considering when shopping for suitable private lenders for their clients. Not all private lenders are the same so it’s crucial for brokers to examine the private lending landscape with scrutiny. By asking the right questions, brokers can then feel confident in selecting a private lender that provides the best possible outcomes for their clients.
Capspace’s lending solutions for SMEs
John Encina is an award-winning former commercial broker with more than 30 years’ experience in the finance industry. With that in mind, John and the Capspace team understand the frustrations of dealing with banks and their slow approval processes, paperwork and documentation requirements, inflexible criteria, lack of transparency, and inconsistent points of contact.
When John became a director at Capspace he was determined to overhaul the SME lending landscape and strengthen the broker / lender relationship. John works closely with a valued, growing network of brokers to find bespoke solutions for their SME clients.
- Find out more about our lending solutions.
- If you have questions about our lending solutions, please contact John Encina.
- Hear directly from our borrower clients.
- See what our valued broker network, SME borrowers, and investors are saying about Capspace.
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