Equipped for success

by Melanie Mingas22 May 2019

Australian Broker attends the Sydney launch of OnDeck’s Equipment Loan, designed to provide funds when the major banks can’t

When it comes to the themes that define 2019, commercial diversification has undoubtedly become one of the most prominent.

While the royal commission influenced this to an extent, new forms of broker education as well as heightened awareness of consumer demand have also played into the trend, and today more brokers than ever before are writing commercial loans.

“We would like to think that isn’t by accident, because over the years, particularly in the last 10 years, we have been boosting prudential and education standards to make sure all our members are professional,” says David Gill, CEO of the Commercial and Asset Finance Brokers Association of Australia (CAFBA).

In 2017, CAFBA commissioned global analytics firm East & Partners to investigate the third party channel’s commercial market penetration. Its report concluded that, on average, 67% of commercial equipment finance was sourced through brokers.

However, the challenges of commercial lending range from security to the fact that banks won’t even consider financing second-hand equipment.

Tackling these head-on for the benefit of businesses across Australia, OnDeck launched a new loan product last month.

Following a soft-launch phase at the end of last year, OnDeck’s new Equipment Loan launched exclusively through the broker network in April, marked by launch events for brokers in Melbourne and Sydney.

The loan has several features that OnDeck says are market leading: not only is it unsecured but there are no limitations on asset age, make or model, meaning even second-hand equipment can be financed.

“Through our research we identified that 30% of our customers were using our Unsecured Loan product to buy equipment, so we are really excited to be able to launch our second product, the Equipment Loan, here in Australia,” says OnDeck Australia CEO Cameron Poolman.

The new product leverages OnDeck’s global reach and systems – as well as its knowledge of communications; cost of funding; partnerships and learnings – to create economies of scale in the Australian market. The lender also has a wealth of information on customer acquisitions and the third party channel, not to mention technology that it can tailor and roll out locally.

To explain these benefits to the local market, OnDeck global CEO Noah Breslow flew in from the US to address brokers at the launch event.

“This is about choice. When we started OnDeck back in 2007, banks were doing a terrible job of serving small businesses in the US, and great businesses every day were having a hard time borrowing to grow,” he says.

“We started the company with the belief that by using tech, analytics and a customer-first approach, and by bringing this product category online, we could serve businesses in a totally different way.”

Twelve years later, Breslow says the vision has become a reality. Today, 95% of SME customers in the US say they have more choices of where to get financing than they did five years ago, and 98% say that’s a positive outcome.

“OnDeck specialises in taking risks when banks don’t know how, and taking those risks in a responsible and intelligent way. We now see an opportunity for equipment finance here in Australia, and we want to bring it into the modern age,” Breslow says.

Funding frustrations

Over the last 12 years, OnDeck has loaned more than $10bn to 100,000 business customers in the US, Canada and Australia. It has also contributed to the development of online SME funding in the markets where it operates, pioneering the SMART Box and heightening transparency of lending contracts.

But for mainstream and major bank lenders, equipment finance remains at arm’s length.

“OnDeck specialises in taking risks when banks don’t know how, and taking those risks in a responsible and intelligent way” Noah Breslow, CEO, OnDeck Global

“Lenders now seem to be overlaying their own consumer credit guidelines onto small business credit. There was no recommendation from the royal commission that said lenders had to do this, but they still seem to be doing it … that’s part of why we welcome OnDeck’s new product,” says Gill. According to Scottish Pacific’s latest SME Index, 53.2% of all SMEs borrow to fund new plant and equipment.

However, the number of SMEs planning to turn to their main bank for funding dropped below the 20% mark for the first time in March 2019.

When compared to the previous index released six months earlier, this is a drop of more than 3%.

In September 2014, the figure stood at 38%. Non-bank lenders were listed as the first-choice funders for almost 18% of SME owners, up from 15% just six months earlier, while the percentage of SMEs who said they would not consider a non-bank lender dropped from 43.5% to less than 33%. Meanwhile, OnDeck calculates that 25% of SMEs plan to seek additional business financing in the next 12 months, with the research revealing that 44% of SME owners would consider borrowing from an online lender.

For OnDeck, this is another area in which its overseas experience pays dividends. “In this type of business, we need to deliver capital quickly to small businesses so they can do what they want to do. To do that we need to have best-in-breed credit models,” says Poolman.

“The US business is on version six of their credit score, pulling a number of different data sources to best predict the health of the business and their propensity to pay us back.”

Supporting the network

Crucially, 70% of Australian SME owners access capital via brokers or intermediaries.

To support brokers, OnDeck has made a series of pledges, including the promise that a borrower won’t be contacted without the broker’s permission, and commission will not be loaded into the customer’s price.

Further, loans can be provided with only six months’ bank statements, dedicated BDMs are on hand to triage and prioritise broker deals, and funds can be cleared in as little as three business days.

“Through our research we identified that 30% of our customers were using our Unsecured Loan product to buy equipment” Cameron Poolman, CEO, OnDeck Australia

“The good thing about a new product like this is that it provides more choice, and every broker you talk to will always welcome having a choice of where to put their business and having a different product,” Gill says.

“In the US there is so much choice for small finance companies, and they are all niche products. We seem to just have four or five choices, and all of them have pretty much the same credit standards. Here the product features I have seen look very good, and I think it will be taken up by brokers and be very welcome.”

Despite the growth in demand for commercial lending, huge numbers of brokers are yet to diversify from their residential focus, due in part to concerns about education and experience.

With the potential abolition of trail commission still lingering on the horizon, that could be about to change, and CAFBA is ready to support those looking to take the leap.

CAFBA’s diploma, to be released soon, will address how different financial concepts in the commercial space should be applied to customers. And there is more to come.

“We have been boosting prudential and education standards to make sure all our members are professional,” Gill says.

“We have just formed an alliance with the National Equipment Finance Association in the US, but the brokers in Australia seem to have a much better reputation and are all very professional. As CAFBA, it is our role ... to make sure that continues.”

Meanwhile, OnDeck is also going from strength to strength.

“We are very proud of our Equipment Loan and we want to engage, learn and understand more from the brokers who use it,” Poolman says.