The shrinking number of credit brokers licensed by the Financial Conduct Authority (FCA) is making accessing, and choosing, the right lender harder, at a time when refinancing and funding is in greater demand from developers.

Michael Ward is director and head of property at MAF Finance Group, part of Begbies Traynor Group

FCA figures show the numbers of sole traders and partnerships with credit broker permissions fell by 47.5% since the start of 2020. This gives developers fewer options when shopping around for lenders and finding the most sustainable deals on the money needed to build.

Whether this shrinking market is due to consolidation or firms winding down doesn’t necessarily matter. What does matter is that only a few of the 3,400 UK brokers left deliver the specific advice needed by developers.

However, the range of lenders entering the market is growing, with many specialising in industries such as property and construction. So, there are lenders with a good understanding of the nuances involved in their chosen sector – but choosing them from the pack can be hard. Add the fact that funding is needed to address many different scenarios – restructuring to ease distress, refinancing to fuel growth, structured funding to develop multiple projects simultaneously – and the task becomes even harder.

The latest data from Red Flag Alert shows that more than 100,000 construction firms, of which more than 12,000 are involved in constructing domestic buildings, are in ‘significant’ financial distress, up 13.9% year on year.

Gaining access: brokers are best able to match lenders with applicants

This indicates that an increase in demand for refinancing deals is on the cards. The data also suggests that a substantial number of distressed construction firms hold more assets than liabilities, so will have an opportunity to refinance against those assets, improve their cashflow and structure a package with lenders that can carry them towards a time when revenue is more stable or increased.

In this climate where refinancing is needed by more companies for a wide range of reasons, a shrinking number of credit brokers and a growing number of lenders make accessing the right money like trying to pour water through the bottom end of a funnel. Some applicants will filter through to gain the benefits of specialist lenders, while others become overflow and are in danger of not being directly connected to the most ideal lenders.

A matter of scale

The positive side of the lender consolidation trend we’ve seen is that developers can use larger brokers to access a wider panel of lenders. This one point of access also increases competition and developers should seek this out.

However, consolidation is not without its problems. Sole traders – which have fallen in number by 22.8% in the past year – have been lauded for their ability to focus on repeat customers they have guided from birth. The detail gathered through these relationships is crucial to getting the right deal and understanding the patterns of revenue that will match with payments. Having larger broker panels, but with a sole trader approach, is crucial to understanding whether invoice financing options, refinancing against assets or even evolving equity versus investor balances to fund developments are the most effective route forwards.

At its core, having the developer’s details written in lender language is essential to a business plan that makes the difference between a company slipping into distress and one that balances the books to thrive at the right time.

When opportunities for growth are rising even faster than distress, developers need to approach this upside-down funnel of access to good finance knowing that brokers must provide the detail needed to access a range of lenders and deliver the right money in the right areas to build.