The last time I visited Commercial First, the company was residing in a small office on the outskirts of Brentwood in Essex. Although it was a great setting, it was clear that, for the future, it simply wouldn’t be big enough to house the company’s ambitions for growth. Six months on and Commercial First has moved. This time round, I am paying a visit to the lender’s much more spacious new home on a business park on the outskirts of Brentwood. Lutea House is modern, bright and spacious, with plenty of room for the company to expand. The team has worked hard to stamp the brand on its new home. Its corporate colours and logos resonate throughout the building, but the real talking point are the ‘rest areas’, featuring state of the art kitchens and plasma screens where staff can relax. It’s clear that the lender means business.

It hass been a momentous couple of years for Commercial First. At the time of interview, the company was putting the finishing touches to its second securitisation in a period of seven months. "The pricing was 20 basis points better than the last one at 58 points, which is pretty unheard of for a company that’s doing a second securitisation in a new asset class like this. It was over-subscribed seven-fold," says managing director, Philip George. "Some of the advisers that sold the deal were comparing it to some of the most keenly priced residential deals," says sales and marketing director, Stephen Johnson. "And if you think about how mature the securitisation of residential deals is, for us to achieve comparable pricing in a brand new asset deal on our second deal speaks volumes," he adds.

David Johnson, chief executive officer at Commercial First, is just as enthusiastic as George and Johnson about the second securitisation and the huge strides the business has made in the past two years: "We have essentially been trading 18 months, but we already have a £300 million pound book and two securitisations in place. We have greatly enhanced our funding lines – both with the amount, return and price we are paying for it. People were a bit jaundiced about funding a start-up commercial market not knowing whether there would be enough business to write, and now lenders, including highstreet names, are knocking on our door."

The funding of the company has come from existing shareholders, and the company’s own banking lines. So far, it has managed to resist the lure of venture capitalists. "It is our belief that using a venture capitalist is not the right route for us at this point in time," says David Johnson. "Our growth has been organic really, and it’s been a real success story which is only going to get bigger." George, the driver behind the success of the company’s securitisation, reveals that Commercial First now plans to securitise twice a year. "That’s what the market really wants to know – that we are not just a one-hit wonder – the fact that we are going to be out there being a progressive and prolific issuer of bonds," he says. The senior management team are certain that the office move will also be seen by the marketplace as a sign that the company is serious about the sector and its future in it. With 50 staff currently employed and firm plans to recruit more, it is clear that Commercial First sees the move as an investment for the future.

"The move proves that we are long-term players and gives our supporters and introducers confidence." says David Johnson. "It shows that we are absolutely committed to the commercial market." While residential mortgage lenders have been working hard to get their compliance in order in time for ‘Mortgage Day’, many commercial lenders have decided not to deal with regulated mortgage business.

However, Commercial First is firm about its commitment to regulated mortgage business and says that 20-25% of its business will fall under regulation. It recently published a guide for brokers entitled Working with Commercial First in a regulated environment. The guide was originally supposed to be just a couple of pages long but has grown to 25 pages. The premise behind the guide was to help clear up confusion in the marketplace about the impact of regulation on the commercial finance sector. But Stephen Johnson is still surprised by the lack of knowledge amongst brokers about how the regulated environment will affect commercial lending: "You would be amazed at the number of calls I have had from brokers who have received the guide saying: ‘Are you doing residential mortgages now?’ Fundamentally, regulated mortgage contracts do exist in the commercial sector and we want to get that message across."

According to Stephen Johnson, around 50% of Commercial First’s brokers are directly authorised, while 15-20% are appointed representatives of a network, which leaves around 30% of brokers not authorised – the majority of this group are commercial specialists rather than just mortgage brokers. "The fact that we can do non-regulated and regulated business is a plus," says George. "Some lenders have pulled out of the market altogether as they only want to do non-regulated business while some want to do purely residential." David Johnson is, of course, seen as a pioneer within the residential mortgage market and there were industry rumours last year that Commercial First was set to launch a residential arm, something which the senior management team at Commercial First were quick to deny. However, as with most rumours, there is no smoke without fire and at the end of the Summer, David Johnson and Philip George announced the launch of The Money Partners (MPL) in collaboration with Kensington. But although the launch of the new lender has been welcomed by the industry, there have been question marks raised over the future role of David Johnson and George in Commercial First. So is the structure of the senior management team at Commercial First set to change, with George and Johnson taking a back seat and becoming more involved in MPL?

"Our roles will not change at all at Commercial First and we remain totally committed to the business," says David Johnson. "In the early days, Philip and I were more involved in the set-up but MPL now has a great management team in place, headed up by Colin Sanders (previously of igroup) as chief executive and we can now take a back seat as non-executive directors." George, like Johnson is adamant about where his future lies. "We wanted to make sure MPL was set up properly, but now it is we can take a step back. I eat, drink and sleep Commercial First – I can assure you of that," he says.

Although MPL will be offering purely residential products, there will be scope for targeting the same set of brokers as Commercial First. "Brokers are now broadening their product ranges and feel that they can’t offer a full range of products by offering residential mortgages only," says David Johnson. "It makes sense for us to get involved with MPL in terms of distribution."

For George, the key lies in the brokers that can be targeted as a result of the relationship forged between the two lenders: "I like to think that many of these brokers will give their commercial business to Commercial First and their residential to The Money Partners." While David Johnson and Philip George enjoy outside business interests, it is clear that for Stephen Johnson, Commercial First is his main priority: "Having David on the front cover of Niche Mortgages (NCF’s sister magazine) with MPL was great but it can’t detract from Commercial First. This is a business that we have huge ambitions for and many people have made a commitment to us and an investment in the commercial mortgage market. For me it is very important that anything that happens residentially doesn’t detract from that commitment."

"Putting my name to The Money Partners brings some introducers comfort," adds David Johnson. "But I have seen and done it all before. This is no way a detraction
on MPL, but it’s like seeing the same film three times – you know what’s going to happen. But I haven’t seen this film before, it’s challenging and it’s exciting." It is clear that, although MPL will be a valuable distribution channel for the business, for the future the focus remains with the development of Commercial First. So what are the lender’s future plans? "We have essentially created a middle market that wasn’t there before," says George. "Big corporates have been served by big investment banks and there are specialised lenders, but we have fulfilled the space in the middle market."

George says that the challenge now is to make further in-roads into this middle market by making more brokers aware about the opportunities that exist in commercial lending. "It is entirely possible that this is a £10 billion market. The challenge we have is to make brokers aware that they can get a 25-30 year term mortgage for their client. We have made real progress but there is further work we need to do." David Johnson says that what singles Commercial First out from high-street banks is that the company is based on a mortgage lending model and is not driven by business lending: "Because there wasn’t a market there before, the view amongst brokers was perception is right or wrong?" adds David Johnson.

"A mortgage broker will come to us with a borrower who doesn’t have accounts and they’ll say ‘this is prime business’, but the reality is that it isn’t because ‘I’ll refer this case on’. And in most cases they will have turned away the business. By making it a mortgage product concept rather than a business lending concept, I think we have invigorated the market and stimulated activity from people who historically would not have seen it as an avenue to go down. Our evolution really has driven activity amongst brokers." He adds that it is the simplicity of the product which is its selling point. "Unlike the clearers, we don’t want to sell credit cards or overdrafts, we want to lend money to help a customer buy a new business or improve the business they have. We have given people the opportunity to borrow money while leaving their banking and other private arrangements elsewhere and we have given them this freedom of choice through a very simple product."

David Johnson says that one of the battles that Commercial First has had to face is the misconception that it is selling sub-prime mortgages. 80% of the lender’s business is ‘clean’ and although Commercial First does offer a sub-prime product, essentially it sees itself operating in the mainstream market. "Sub is below level but if someone doesn’t have three years accounts how can that make them ‘bad’? I would like to change the tag to non-conforming. Eighty per cent of our borrowers would fit into the mainstream perception, but who’s to say that the mainstream perception is right or wrong?" adds David Johnson. "A mortgage broker will come to us with a borrower who doesn’t have accounts and they’ll say ‘this is prime business’, but the reality is that it isn’t because the customer doesn’t conform to high-street requirements," agrees Stephen Johnson. "In the residential market you have a sub-prime market, but in the commercial it all gets bundled into one group. These customers are disenfranchised." At the beginning of this year, the company introduced a new tier of LTVs, offering a higher level to ‘clean’ customers. So what was the reasoning behind this development?

"We changed our LTVs to help our customers. Seventy-five per cent was a high LTV, but brokers wanted to add on valuation fees. Brokers were saying to us that paying the fees upfront was putting a strain on cash flow in those early months, so we increased the LTV so borrowers could effectively borrow their fees as well."
Going forward into 2005, David Johnson predicts

that more brokers will enter the commercial finance sector because of regulation and increased competition in the residential market. He says that brokers will need to broaden their income stream and commercial mortgages are a natural add-on: "Usually where America goes, we follow, and in the US 85% of commercial business is attracted by brokers – whereas in the UK, it stands at 15%. I think we will definitely see this increase and we will play our own part in that," he says.

Another important focus for Commercial First in 2005 is distribution to enable the company to be able to relay its message to as many brokers as possible. "Brokers are spending a huge amount in advertising. Ocean is a classic example, and a lot of that catchment of advertising does attract people who want to buy small businesses or improve the businesses they have. I see our distribution growing in the market through those particular sources," says David Johnson.

the customer doesn’t conform to high-street requirements," agrees Stephen Johnson. "In the residential market you have a sub-prime market, but in the commercial it all gets bundled into one group. These customers are disenfranchised."

At the beginning of this year, the company introduced a new tier of LTVs, offering a higher level to ‘clean’ customers. So what was the reasoning behind this development? "Huge distributors like Bankhall with 12,000 advisers will start making huge in-roads into the sector. For us this is an opportunity, we are speaking to them and we want to make our proposition as easy and as straightforward as possible," he adds.

"We want to stimulate the market and help brokers cultivate their leads, giving them the message that if they want to do the business they can, but if not, there
is a variety of people around the country that can provide specialist advice to the customer and place the mortgage in the market," says Stephen Johnson Another key message that Commercial First wants to give to brokers is that there are other forms of finance other than asset or leasing which can serve the needs of clients. "We have discovered some customers who have borrowed on their equipment up to the hilt at quite high rates, while residing in a mortgage- free property," says George.

"The FSB recently revealed that credit card borrowing for small businesses has increased by 150% in the last year which is a frightening statistic, but I think it highlights that a lot of SMEs need cash," agrees Stephen Johnson. "A mortgage on secured property offers them the most cost-efficient, long-term fixed repayment option. It makes perfect sense for brokers to educate their clients that all roads don’t necessarily end at the bank manager."

George says that another focus for 2005 is to refine the range of products on offer, while still concentrating on the middle market: "We may look at some of the larger advances that have good security or propositions with a very good business element. And although we will still lend on bricks and mortar, we may want to attract good business customers who may want a mortgage with us, but will have a current account with their bank." The team are adamant that Commercial First does not have any plans to expand its product portfolio to offer other business services such as factoring or invoice discounting – the company’s core focus will be on improving the current service on offer and refining its products.

"That is the culture we are fostering in the company and that is our burning ambition," says Stephen Johnson. "The high-street lenders will subsidise their mortgage business to ensure customer retention and customer acquisition with ancillary products, but that is not our business." One factor that has helped Commercial First sell the concept of commercial lending to mortgage brokers is the credibility that its senior management team enjoys. "They’ve given us air time so we can explain the virtues of the commercial market," says David Johnson. "The other fringe players haven’t really got beyond reception."

That’s not to say that relationships with other more established commercial players haven’t been developed. "We are also working with brokers who are established in the market and can provide a wide range of services, including leasing and asset – almost like a business advisory service. There are also a small number of very significant players, such as thinc and Solent who are very big in this sector. They have dedicated units just doing commercial business." So does Commercial First have any plans to go direct? "No," says George. "But we would like to join forces with some of the major intermediaries and help them with an awareness campaign, but it will be them who will be attracting that business." "For us it’s a partnership. We are an intermediary lender and that’s very much our business model," says Stephen Johnson.

"We are trying to encourage brokers at every level to be introducers. Some of them will wish to do it in a large capacity, others will wish to do it on a smaller scale, but the message is you can have a great income potential from commercial lending." For the future, George says that Commercial First may develop a relationship with a high-street bank. "Most banks don’t really want to offer mortgages to business customers and certainly not on the repayment terms that we offer. However, they do want to retain the customer with banking facilities. I think in the next five years you may actually see us working with a major bank where we take the mortgage and they keep the business relationship."

"Customer retention is key and is the number one driver for us. If big banks are unable to service the mortgage needs of the client than they risk losing them," adds Stephen Johnson. Presently, Commercial First appears to be enjoying dominance in a middle market which they have cultivated and developed, but will there come a time when another lender will want to jump aboard the commercial bandwagon and steal some of its thunder? "It’s interesting when you compare our development with the early development of the sub-prime residential sector," says David Johnson. "CMC, Kensington and Platform all took each other on quite early on. But for us, our competitors have given us a real run at it and sat back to see how we get on. But I think the more time they give us, the harder it will be
for them."

"There are those lenders who may have thought about doing commercial alongside their existing projects," says Stephen Johnson. "But any business is the same, if you have other distractions and you are not 100% committed, it’s not going to happen. We made the commitment on day one to drive broker involvement in the market and that’s all we think about day and night." "We have proved that you have to be totally focused and totally specialised in commercial," adds George.

"If another residential lender entered the market, at best they are going to be second and at worst they are going to detract from their residential proposition, so they will suffer." Now, almost two years on and with an office move and two securitisations under its belt, the team predict that Commercial First will write between one-third and half a billion pounds worth of mortgages in the next 12 months, but George and David and Stephen Johnson are the first to admit it hasn’t always been an easy ride. "It’s been inevitable that this year organisations, including ourselves, have been concentrating on getting compliance in place, but 2005 is going to be a big year for us and for brokers as they concentrate on selling again," says Stephen Johnson. "Other people haven’t moved into the commercial market before because it’s bloody hard," adds David Johnson. "It’s not easy to attract warehouse lines, it isn’t easy to attract business, it isn’t easy to securitise and it isn’t easy to get management in place. But we have achieved all those things. We are pathfinders in many ways. We have sown the seeds and now it is time to reap the harvest."