Looking under the bonnet again

It’s safe to say the market has become more reflective in recent times. Not in an alarmist way, but in the sense that people seem to be asking different questions than they were a couple of years ago, when speed, growth and expansion were the dominant measures of success and almost everything else faded into the background.

You can sense parts of the specialist lending market looking under the bonnet again. Not just in terms of new transactions coming through the door, but existing books as well. Funders are spending more time reviewing positions, carrying out additional due diligence and seeking greater comfort around governance, controls and how deals are performing once they move beyond completion. There’s definitely more attention now on making sure that things are progressing as planned and that there are no “skeletons” sitting in the background.

For a while, the market became very impressed by momentum. Businesses growing quickly attracted attention, large origination numbers created reassurance and aggressive appetite was often interpreted as a sign of strength. At times, the industry almost became conditioned to assume that if something was expanding rapidly, then it must automatically be working.

But sustainable lending businesses are not built overnight, and rapid growth should probably create as many questions as it does headlines, particularly in a challenging market. Sometimes the industry becomes so focused on how quickly something is growing that it stops asking how it is growing.

A transaction can look perfectly comfortable at the beginning. The structure works, the borrower appears credible and the exit makes sense on paper. The more difficult part usually comes later, once projects start taking longer than expected, refinancing becomes harder or costs move away from where they were originally budgeted.

That is normally when you discover whether enough realism was built into the deal at the outset.

The value of judgement

It takes patience and consistency to build a lending business properly, but it also requires a willingness to decline transactions that don’t stack up, or to offer to lend less when you step back and look at the wider picture.

The deals you refuse often tell you more about a lender than the deals you complete. At Inspired Lending, we have always been comfortable being selective, making an effort to lend the right amount to the right borrower in the right circumstances. If the fundamentals of the deal stack up, we will support it, but if they do not, then sometimes the right decision is simply not to lend. We have no appetite for backing transactions that are likely to fail.

This is where experience comes into play. In some parts of the market, if a deal fits the calculator, it proceeds. Equally, there are transactions that may initially sit outside a standard process where the underlying structure is actually very solid once you spend time properly understanding it.

Looking under the bonnet after completion

That’s also why scrutiny should not stop once the loan completes. At Inspired Lending, we have always believed that staying engaged throughout the life cycle of a deal is just as important as getting comfortable at the outset, because circumstances change during the term of a loan and the right outcome is not usually achieved by simply sitting back and hoping for the best.

None of this is really about criticising ambition or suggesting the market should become excessively cautious, because growth is a healthy part of any lending sector. But there’s a difference between growth that is sustainable and growth that simply appears impressive while conditions remain favourable.

And perhaps that’s where the market seems to be recalibrating slightly now, moving back towards fundamentals and rediscovering the idea that stable lending businesses are usually built over time rather than appearing overnight.

Because healthy lending is probably not defined by who can move fastest when conditions are easy. It is defined by what still holds together once the market starts looking underneath a little more carefully again.