Beyond the Rate
Andrew Jackson
Introduction
For business lenders, what happens when a borrower defaults can be just as important as the original lending decision. Collections and recoveries strategies directly affect profitability, customer outcomes and, increasingly, the reputation of the broker who introduced the deal. Approaches vary widely, from lenders willing to support viable businesses through temporary difficulties to those pursuing aggressive enforcement and substantial default charges. Understanding these differences is becoming an important part of responsible business finance.
Losses on defaulted loans are a direct cost to a lenders’ bottom-line. At worst, too many losses cause Senior facilities to be pulled, resulting in existential crisis. Lower-risk lenders mitigate this risk with fewer defaults, whereas higher-risk lenders offset losses against higher lending rates. Across the board, collections and recoveries strategies are instrumental for profitability and survival.
Collections and recoveries strategies reflect the culture of the lender, and its financial strength. A lender who is fighting for every penny of profit may not give their customer any flexibility, and they may apply extortionate default fees. Aggressive collections strategies, particularly at the higher-risk end of the spectrum, can make all the difference between a long-term customer surviving or going under.
During the banking crisis of 2008, many banks did not want to recognise their losses on their balance sheets. They were criticised for their strategy of “extend and pretend”, which later became “delay and pray.”
When Fintech emerged in 2010 it adopted some of the banks’ culture of hesitancy, together with the care of consumer collections. As a P2P lender, Funding Circle had a collections policy of “Survival for Revival”, which was highly successful in keeping business-owners out of insolvency proceedings. Yet, in the unregulated world of commercial lending, such softer and reputationally sensitive approaches were unnecessary and, in many cases, undesirable. As the alternative finance market matured it became more assertive, driven by a need for profitability and ROI.
The highest risk alternative lenders do not cap their default fees or default interest, and some even make super-profit from distressed customers. In response to this, the best brokers are taking a more holistic approach to their clients’ needs. These business finance professionals are not just comparing rates, terms and security; they are also considering how different lenders treat their customers in times of distress.
Liam Meehan, Principal Business Finance Specialist at Funding Options by Tide explains: “Rate isn’t always the deciding factor. I’ll often present two options: Lender A at a lower rate, Lender B slightly higher, and explain exactly what you’re getting for that difference. In industries like construction for example, a lender’s track record on payment holidays and collections flexibility can matter more than a fraction of a percent. My job is to give clients the full picture, and that transparency is what leads to building a relationship where clients come back to me over and over again and refer their friends/colleagues.”
If a client ends up facing heavy-handed recovery tactics, unclear communication, or unexpected fees during a difficult period, it may reflect on the broker who placed the deal. Conversely, a lender known for fair, transparent, and proportionate collections handling protects the broker's relationships and referral pipeline. Whilst it is not necessary to scrutinise every lender’s collections policies, a general understanding of such policies distinguishes business finance professionals from simply brokering a transaction and genuinely acting in their clients’ best interests.
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