Leaving the comfort zone

by Melanie Mingas11 Jul 2019

The why, when and how of moving into commercial finance, as explained by lenders and aggregators

When the royal commission released its recommendations for the future of the financial services industry, the outlook for mortgage brokers was anything but rosy.

In response, thousands looked at how they could diversify their income to protect the future viability of their business.

From commercial to auto finance, SMSF lending, business loans and even financial literacy programs for consumers, the ideas came thick and fast.

While the election of a probroker government has since negated much of that work, thousands who operate in the third-party channel have realised that putting all your eggs in one basket has rarely made compelling business sense.

“It is an interesting observation to suggest diversification may no longer be important,” says Peter Vala, GM partnerships and distribution, Thinktank.

“In our view, recent industry events have been an awakening as to why diversification is a vital strategy to consider. Diversification of revenue when it comes to a broker’s business can provide an increased level of protection against potentially adverse changes in the industry while also opening up the opportunity for leveraging additional business with existing clients and increasing the prospects for developing an even wider, more valuable client base,” Vala adds.

“We believe the rationale for diversification really is here to stay and should be seriously considered when it comes to building a robust, sustainable business with a broad income base,” Vala continues.

His comments are echoed by Bluestone’s head of sales, Royden D’Vaz.

“Protecting revenue or cash flow, be it by diversification or other means, shouldn’t be looked at as a short-term priority that is only relevant in times of uncertainty. Rather, it should be an integral part of long-term business planning,” he says.

“If brokers are not asking their customers about their diverse needs then someone else will be, and they ultimately risk losing these customers altogether”

D’Vaz notes the lending environment changes with each economic and property cycle, influenced by everything from regulatory intervention to macro and micro-economic factors, geographic and demographic factors that all influence demand.

He adds, “Building on strategies that protect a business while conditions are favourable is key to preventing reactionary and potentially sub-optimal moves in times of decline.

“As such, I believe that any time is a great time to start creating new income streams, and there’s no better time than the present to explore certain under-serviced segments of the market, like near-prime and self-employed borrowers,” he continues.

The first steps

While a huge commitment in principle, diversification starts with a single step – deciding which area of lending will generate the most successful outcomes.

“If your business is standing still, it’s going backwards. It’s imperative for a broker’s business to grow and to ensure their offerings are meeting their customer’s needs and expectations,” says Mario Rehayem, CEO for Australia at Pepper Money.

In doing this, Rehayem says that brokers should consider their strengths and “learn how to play to them”.

After all, the key to a successful broking business is to anticipate and respond to the needs of as many customers as possible.

Failure to do so will see that customer look elsewhere. Pepper Money says that more than 60% of borrowers refinance their mortgage with another broker, adding to the need to offer a solution that reverses that trend.

“If brokers are not asking their customers about their diverse needs then someone else will be, and they ultimately risk losing these customers altogether,” Rehayem adds.

“Remember, the information a broker gathers about a customer during a home loan enquiry represents the bulk of the information, if not all in some cases, required to complete an auto loan, a commercial loan or a personal loan,” he continues.

“We believe the rationale for diversification really is here to stay and should be seriously considered when it comes to building a robust, sustainable business” Peter Vala, GM partnerships and distribution, Thinktank

Next is to consider the cost of what is essentially an expansion of the business. Rehayem observes multiple low-cost ways for a broker to expand their services, from establishing a referral network to re-training support staff or changing existing processes.

With these elements in place it is time to start talking to customers.

As daunting as that first conversation can be, expanding the broker-client interaction will road-test the new strategy and provide the most useful feedback on how to hone the proposition.

“For brokers moving into commercial lending, it’s all about being prepared to discuss their client’s business strategy and future plans. Those discussions allow a broker to identify appropriate products and solutions.

“For the new-to-industry broker, it’s important to remember that a broker’s business needs to remain customer centric and solution orientated,” Rehayem adds.

To support brokers throughout this process, Pepper has developed technology and support programs such as the Pepper Product Selector, which can provide the rate, fees and an Indicative Offer (where applicable) in less than two minutes.

“Pepper’s five-step process – a proven approach to successfully positioning a specialist home loan with a client who may have not been expecting this type of solution – makes the transition to offering new products to a client a whole lot easier,” Rehayem adds.

Drawing on experience

Lenders too are diversifying. Having built its business as a specialist commercial lender to SMEs, Thinktank is now offering a range of residential lending solutions including full- and alt-doc loans, to its SME and self-employed clients.

“Diversification has been a good play for us,” says Vala. Sharing the advice that has underpinned their own success, Thinktank suggests several key points to consider in the diversification process.

Once a review of existing clients is complete, Vala says the next step is to look at what their business does and where it operates from.

With interest rates as low as they are, there is a strong case for buying a commercial property.

“Building on strategies that protect a business while conditions are favourable is key to preventing reactionary and potentially suboptimal moves in times of decline” Royden D’Vaz, head of sales, Bluestone

If the client already owns their premises, consider the finance against it and whether there are better products, prices or terms that can put the client in a better place.

“Even taking out finance against unencumbered property is a frequent means of investing further in a business, or supporting external wealth creation goals,” Vala says.

“Then talk to your referral partners such as accountants, financial planners and lawyers and find out what you can about the industries their clients are active in, and where their needs and interests are. This sort of review should produce a good level of insight into potential opportunities and the encouragement of broader business initiatives,” Vala adds.

Product knowledge is the next consideration.

For example, debtor finance can greatly assist client cash flow by speeding up the receipt of income, while equipment finance can be used for the replacement of tired assets or the expansion of a business.

Following this Vala offers two pieces of advice for any broker planning to move out of their prime focus area: establish strong relationships with several lender BDMs who can providing a sounding board for transactions, and put systems and processes in place to ensure that a return will be forthcoming.

“Commercial transactions can be more complex and take longer than residential loans.

Take care with clients who might be just shopping a transaction in order to extract a better rate with their current institution.

You can help them out in these situations but manage the time and effort involved and see it as an investment in creating future opportunities.

“One way to ensure the transaction and client are genuine and receive payment in the process is to put a fair mandate letter in place which then secures you the transaction and defines both the scope of effort and what the mutually agreed outcomes are,” he adds.

Closer to home

Although diversification conjures up images of going above and beyond one’s comfort zone, that does not necessarily have to be the case.

For example, a mortgage broker operating in a high-income metro area will likely have seen borrowers who were previously considered prime vanilla customers sliding into the near-prime or alt-doc category.

While still dealing in mortgages, the change of step requires new skills and different considerations. “If a broker has only ever dealt in prime mortgages with the major banks, this would be an easy first step. It’ll open up a whole new range of customers and products without the need to learn a drastically different set of skills,” D’Vaz says.

“The banks’ retreat up the credit curve left many borrowers behind who never before struggled to access loans. Brokers are in the perfect position to alleviate these issues because of their deeper industry knowledge and relationship with more lenders, who may be able to offer a larger range of solutions,” he adds.

When it comes to maximising the diversification opportunities in mortgage lending, there are opportunities for the commercial broker, too.

“Diversification can equally be applied to commercial brokers seeing potential in the residential space, as one way or another, the majority of a commercial broker’s clients will have residential finance needs,” says Vala.

“Either way, it is about offering clients more holistic solutions for most, if not all, of their financial needs,” he adds.

The tools for the job

As FAST CEO Brendan Wright explains, in addition to the referral partners and CRM mining, another important consideration in the diversification process is to have access to an equally diverse range of lenders.

With a panel of 36 lenders, including several white label options and specialist lenders, FAST has developed a series of specific capability programs for commercial and asset finance lending in partnership with such industry bodies as the MFAA and CAFBA.

“Making the transition across product solutions can be challenging at first; however, for those starting out we recommend building knowledge, making the most of BDM support, opening up to networks and asking as many questions as possible,” says Wright.

FAST actively encourages its brokers to consider writing loans across residential, asset finance and specialist commercial broking areas such as invoice financing and trade financing.

“In many cases where a customer is self-employed, their home lending and business lending become closely linked. However, shifting property markets have made it more difficult for business owners to use property as collateral for a business loan.

“Shifting property markets have made it more difficult for business owners to use property as collateral for a business loan” Brendan Wright, CEO, FAST

In addition, tightening credit conditions have also contributed to a slowdown in funding supporting the business sector,” Wright says.

Business lending is just one potential avenue and Wright says there are many parallels brokers can find with their SME clients, who may require financing for an array of reasons – whether that is to meet short-term cash flow challenges, or to expand or replace equipment.

“The one thing these businesses have in common is that they find accessing finance difficult, so from this perspective diversifying into commercial broking is a win-win for both brokers and their customers.

“Brokers are business owners and therefore in a unique position to understand their self-employed clients. It makes sense for brokers to build the capability in their business around business models, strategy and final statements to enable them to meet the business and personal needs of their client base,” he adds.

Accreditation is also key, whether the intended diversification will incorporate home, business or asset finance.

As a result of the aggregator’s groundwork, more than 60% of FAST brokers offer more than one type of lending solution to their clients.

Further, 88% of brokers who attend FAST workshops have lodged a loan in a new product line within a month of attending.

The sixth edition of the MFAA’s Industry Intelligence Service confirms a 25% increase in the number of mortgage brokers who wrote commercial loans in 2018.

As that figure increases further the competition to access support tools, PD resources and even clients will become stronger.

For those who are serious about spreading their risks and maximising their business streams, the time to diversify, truly is now.