In the UK, there are hundreds of different types of finance, from unsecured lending to real estate bridging loans. While the financial sector in the UK is highly developed, there are constantly new lenders and products entering the market. One of the new trends, which has recently taken flight in the UK is the development of smart finance. While smart finance may seem complex and difficult to understand, it is merely an evolution of traditional finance. This article will aim to define smart finance in a UK context and highlight how it can be used to benefit borrowers.
What Does Smart Financing Mean?
Smart financing cannot be illustrated through the use of a single product as it is an approach used by borrowers to ensure that they are accessing the best tools for their requirements. By adopting a smart financing approach borrowers can ensure that they are maximising their returns limiting their exposure to unnecessary risk. The adoption of smart financing encourages borrowers and investors to:
- Find flexible loan terms that are directly aligned with the borrowers investment requirements
- Maximise the use of leverage in a way that enhances investor returns
- Ensure funding sources are sufficiently diversified so as not to be overly reliant on one lender
- Ensure that they are sufficiently informed on all the relevant factors, including tax, cash flow and exit strategies.
In short, smart financing ensures that investors and borrowers are equipped with the necessary tools to stay agile in a complex, ever-changing market.
Why Is Smart Financing Important for Modern Investors?
Smart financing is increasingly important as the lending market evolves. Today’s borrowers and investors are exposed to a complex lending market which includes:
- Strict lending criteria and complex financial regulations
- High interest rates and expensive borrowing costs
- A changing tax environments
- Complex geopolitical landscape, both globally and in the UK
- An increased importance placed on ESG and environmental sustainability initiatives
While it can be difficult to navigate these factors, the implementation of a comprehensive smart financing model can help investors withstand external forces and reduce their overall exposure to risk.
Innovative Funding Options for Modern Investors
There is a vast array of funding products available on today’s market, it is important to understand what they are are how they work prior to applying for finance. Let’s breakdown some of the more common forms of finance that fall under smart finance:
1. Bridging Finance
Bridging finance is a short term loan that is designed to “bridge the gap” between a current expense and a future income. While they are used for a number of different reasons, they are most commonly used to purchase a new property prior to the sale of an existing one. They are fast to arrange and are generally more flexible than traditional forms of finance, but it is important to understand that they may have high interest charges, making them better suited for shorter terms (between 3-24 months).
2. Mezzanine Finance
Mezzanine finance is another popular form of finance, especially in property related transactions. Mezzanine finance sits between senior debt and equity on the capital stack, and, as a result, is often more expensive than senior debt. While there are a number of reasons to use mezzanine finance, it should typically only be used to top up the senior debt, giving the borrower access to additional funds to bridge the gap between the senior debt and their required equity contribution.
3. Joint Venture (JV) Finance
Joint venture finance is an alternative to traditional forms of debt finance. Where debt finance relies on the borrowing of funds, a joint venture is where an investor can partner with another investor, increasing the overall equity contribution and splitting the profits in exchange. The primary reasons people engage in joint ventures is to reduce the overall debt and partner with experienced investors who can offer guidance and advice.
4. Private Banking and High-Net-Worth Lending
Private banks are a popular option for HNWI who require some form of borrowing. Private banks are able to offer more flexible mortgage terms to their clients. In return for this, they require that their clients place assets under management with them. While this is an attractive option for investors, there is often a minimum required AUM to establish a private wealth management relationship with a private bank, restricting this option to HNWI.
Conclusion
Smart financing gives investors more flexibility with their funding sources, enabling them to access different types of finance from different sources. While some funding sources may be better suited to certain investors/projects, it is important to understand how your choice of funding will impact the success of your project.