A question that is often asked is where do bridging company get their funds from? In total there are approximately 60 active specialist bridging finance companies and each of these needs to source their funds from somewhere in order to be able to make new loans.
The mainstream banks that provide bridging services often source their funding from the general public. This is via the funds we each deposit with them in our current accounts and savings accounts. One of the reasons the British banks are able to offer fee free current account banking is because the vast majority of these current accounts don’t pay interest on the funds that they are holding.
These banks are therefore able to combine all the funds in these individual accounts and sell this money to their customers who require a loan. Hence, in effect, the cost of funding for high street banks is the expense of running each of our current accounts for free.
A similar thing happens with our saving accounts, but where savings accounts differ is that the banks pay interest to savers in order to persuade them to deposit money with them. Therefore if the bank sells money (i.e. offers bridging loans) at 9% per year and they only pay savers 1.5% per year then this they make a whopping 7.5% margin. This of course does not take account of the high street banks’ very significant overheads, but it is no surprise that at a gross profit level selling bridging loans is extremely profitable to them.
For this reason, it is very attractive to lenders to be able to offer savings account services. The problem is that you need a full banking license to able to do this. Outside the high street banks there are only a couple of specialised bridging companies that hold a banking license and are able to fund their lending in this way.
Pre-2007, the majority of specialist bridging finance companies funded their books via a combination of investors’ funds, either from their own shareholder or external individual investors, and bank funding lines.
In the good old days the banks and other financial institutions were extremely keen to try and get money out into the market. This meant that bridging companies would obtain funding lines from the likes of NatWest, Clydesdale, etc and this is where the bulk of their funds came from.
The banks were able to use bridging companies as distributors for their funds and instead of having to source £25m of borrowers, they could advance £25m to the bridging company, who would then distribute these funds to their individual customers.
In effect, the bridging company was just buying and selling money, no different from any other trading business. Bridging companies bought money wholesale (i.e. £25m of money) at one rate and then sold their money retail, to the general public, at a higher rate.
This is why on valuations that are carried out for bridging finance companies you will often seen the report jointly addressed to the bridging finance lender, together with a mainstream bank.
Post 2007 it became vastly more difficult to source bank funding lines and as a result we have the seen the emergence of ultra high net worth individuals entering the market. A recent example of this is the investment made by the William Pears Group into Masthaven.
The William Pears Group is owned by the three Pears brothers, whose net worth is estimated by the Sunday Times Rich List to be £1.6 billion. In March 2011, the group invested a significant amount of funds into Masthaven to assist in funding the growth of the companies’ loan book.
Readers of the rich list see can Masthaven being mentioned in the Pears family rich list entry number 37.
Other ultra high net worth individuals who have recently entered the market include Fred Done (Betfred the bookers) and the Candy Brothers.
Due to the increased difficulties which bridging finance companies face in trying to raise additional funds, it is vital that brokers only introduce their clients to bridging lenders who they are confident can come up with the money when needed.
Unfortunately, the last couple of years are littered with examples of bridging finance companies letting their borrowers down at the last minute due to a lack of funds.