I am a great advocate for business generating profits however there is a fine line between fair and ethical practices on which a long term business can build and some of the less ‘attractive’ practices.
In my opinion the recent media which continues to try and justify ‘Default’ rates for short term ( bridging lending ) treads the wrong side of that line. The argument made FOR, which I have taken directly as a quote from a recent article is: ‘ Default rates help to focus the mind of a borrower as they approach the term end of a facility and encourage them to discuss alternative options before it’s too late to do so.
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In my opinion this is wholly a false premis. A responsible bridging lender should be in regular contact with a borrower at various stages of the contract , gently reminding the client of the term remaining and ascertaining the level of progress made in respect of the exit. This gives the lender an understanding of any problems which may arise AND the opportunity to discuss those ‘alternative options’ . The application of a default rate should not be a pre-requisite of these discussions.
Bridging finance is already a relatively expensive way for a client to borrow ( though I accept much cheaper now than in years gone by ) and sensible lenders with good underwriting should be able to make a fair and ethical profit on their day 1 rate. Moreover, on those occasions when things do not go to plan, the lender continues to profit without additional acquisition costs by applying further interest at the initial contractual rate for that additional time. In my opinion Default Rates have only one benefit and that is to a lenders ‘bottom line’.
As a responsible lender I would ‘implore’ all participants in the market to carefully consider if this model is in all our best interests. Let’s take the lead and not wait until inevitable intervention by regulators who recognise poor practice!