The vaunted credit crunch is firmly upon us. There is much in the press about how global financial institutions are affected, but little about the effects on our own industry. While not as dramatic as the multi-billion pound losses reported by international banks, there are three key ways lenders in our industry have changed their underwriting practices in recent months.
Traditional lenders to the business customers of Simply Business have broadly tightened requirements for unsecured lending, and overdrafts in particular. Our business customers are finding it more difficult both to obtain and to increase the size of overdrafts. At the same time, more businesses are being invited to look at invoice finance as a substitute to fund working capital needs.
Similarly, many providers of invoice finance are also tightening underwriting criteria. Others are enforcing existing underwriting guidelines more strictly. This has created more customer enquiries from businesses seeking to switch to new, more flexible (or lenient) lenders.
Other asset-backed lending criteria are also tightening. This is especially obvious with commercial property, where loan to value ratios are steadily shrinking as lenders worry about the declining value of such assets. Where a particular lender might have lent 80 percent of appraised value a few months ago, 70 percent is now more the norm.
So what does this mean for our industry?
Taking a positive viewpoint, the tightening of commercial credit presents an opportunity for specialist lenders which take a long-term point of view. More businesses will seek alternatives to their existing lenders this year than in the past. Accordingly the opportunity to grow market share is now bigger than in past years.
Moreover the long, historical declines in pricing for commercial credit should slow (and possibly reverse) during 2008. As lenders’ costs of funds rise and underwriting criteria firm, fewer potential customers will be lost to competitors because of pricing issues. Conversely, service and flexibility will increase in importance for winning such new customers.
This year is a real opportunity for the asset backed lending industry to capture market share – both from other asset backed lenders and especially from unsecured commercial lending products. Growth in both the number of customers and the share of lending that is asset-backed could accelerate.
2008 presents a real opportunity for savvy (and brave) asset-backed lenders with a long-term view. More businesses will seek alternative financiers this year than in the past. Pricing will be firmer; competition diminished. This will be a year where the market shares amongst lenders will shift more than in the past. For the strongest and the bravest, 2008 will be a year of opportunity.