Tim Wilson of Close says premium finance will get more expensive, but it’s worth it.
"May you live in interesting times,” goes the old Chinese curse. From the perspective of the global financial markets, times have never been more interesting. Capitalism itself has been effectively on trial as the US Congress thrashed out the principles and terms of an unprecedented public rescue package for the banking system.
The liquidity provided by banks is the linchpin on which the global economy turns. The credit crunch, arising from huge losses in the US subprime housing market, has led to a vast reduction in that liquidity.
Packages of these US debts have been sold on between banks around the world, spreading the contagion of worthless, or near worthless, assets through the system. Most financial institutions rely on sourcing wholesale funds, such as inter-bank loans, to finance their activities. As funding lines expire, many institutions are finding they can’t be renewed as paranoia spreads about the ability of many banks to meet their obligations.
This is effectively what happened to Northern Rock, whose model depended heavily on wholesale funding and whose loan book was many times larger than its deposit base. But Northern Rock, whatever the exposure to the UK taxpayer, is beginning to look like small beer compared to some of the other casualties.
It would have been unimaginable, even six months ago, that within a couple of weeks Lehman Brothers would have filed for bankruptcy, Merrill Lynch would be forced into the arms of Bank of America and HBOS would be delivered up to Lloyds TSB. These followed the earlier failure of the venerable Wall Street institution Bear Stearns.
We remain in parlous times but, whatever the outcome (and there will be severe consequences for the global economy), the old banking model may have passed for ever. Perhaps we are moving into a new, less bullish and probably more regulated era.
How does all this affect brokers and their clients? Clearly, companies and individuals are going to find credit far harder to obtain and more expensive. Many companies are already having difficult conversations with their banks. For consumers, the situation in the UK mortgage market is fraught. Where for years borrowers rode a wave of readily available loans (which spawned a debt bubble now starting to bite us), the situation has changed. Apparently outmoded terms such as “substantial deposit” are being heard again on the high street.
“Premium finance will become a far more attractive offering to clients. It also provides protection to brokers in a period when insolvencies are likely to increase.
Premium finance will become a far more attractive offering to clients as an additional line of credit, leaving scarce facilities available for other purposes. It also provides protection to the broker in a period when insolvencies and subsequent bad debt are likely to increase significantly.
At Close we are seeing a deterioration in credit quality across a number of business sectors and this will continue for some time. The ability to assist the client with payment
of a major overhead remains a powerful tool in the broker’s armoury. Pressures on companies will only increase as an (eventual) hardening market combines with a declining economy to put more pressure on client finances.
Premium finance will also become a little more expensive and I make no apology for this – the days of cheap money are over. If the product is to remain available on a sustainable basis, pricing will have to reflect that. Perhaps a bit more maturity is overdue in what has been an overheated market.
Brokers need to select their premium financier with as much care as they would their own bank. A healthy premium finance company will have stability of ownership by a highly rated organisation with a solid deposit base; no exposure to “toxic” investments, derivative investments or to the US investment banking sector and the ability to source long-term funding even in a tough market. Brokers would do well to assess whether their own provider can tick all of these boxes.
Tim Wilson is sales and marketing director at Close Premium Finance.