As finance brokers battle to increase their business amid a residential lending slowdown, they could boost growth by diversifying their revenue streams and providing clients with commercial funding solutions, writes Matthew Johnson, co-founder and managing director of Marketplace Finance
With many clients feeling the brunt of large banks having wound back property lending appetites in recent years, and given the onerous capital controls imposed by APRA, there is a clear opportunity for mortgage brokers, lawyers and accountants to move into the commercial funding space.
The commercial finance market has experienced steady growth in recent years, without the peaks and troughs of residential lending.
While demand from investors for residential credit dropped 0.1% during the 12 months to 30 September 2019, down from 4.6% growth over the year to September 2017, the market for business finance has been mostly steady.
Business credit grew by 3.3% over the 12 months to 30 September 2019, slightly down from 4.1% in September 2017, according to data from the Reserve Bank.
Separate data from the MFAA shows that in the six months from October 2018 to March 2019, the total value of commercial loans settled by mortgage brokers slipped by 1.6% from $8.94bn in the previous corresponding period to $8.79bn.
So commercial credit has fallen, but not to the same extent as home lending.
That brings home a very important point: residential lending is becoming more onerous and less fruitful for brokers and other referrers, and the funding gap left by banks pulling back on their commercial lending is beckoning to be filled.
Herein lies a clear opportunity for commercial lending to fill the gap. This will help brokers and others achieve greater business growth, revenue and diversification, especially given the signs that the economic outlook is improving, which will likely trigger greater demand for commercial finance.
While there are a range of commercial funding platforms that can help referrers fill the gap, brokers need to be confident that if they refer clients to a platform, they will keep their clients.
A broker must be able to refer a deal knowing they will not lose their client; that a funding platform will never separately market to their client.
If a debt facility is ever varied or increased, the broker must be able to continue to receive payments, including trail commission.
The risk of a referrer losing clients is a big fear for many brokers, and a commercial funding platform must overcome this fear.
Brokers must be able to keep their clients and manage loans from an initial enquiry all the way through to loan submission, with a commercial funding portal in place to support this function.
This should also allow the broker to quickly summarise the information required to assess a deal and thus provide a funding service to their client without needing a detailed knowledge of commercial finance.
Most importantly, the success of any commercial funding platform will be determined by whether brokers can write more business without losing their clients.
The opportunities are there for the taking for all referrers to extend into business lending.
We’ve seen that access to business finance has improved markedly since the GFC, and debt-servicing costs are near historic lows. Nevertheless, small to medium-sized businesses continue to face challenges in accessing finance, and the domestic banks have scaled back their exposures to certain higher-risk sectors such as commercial property.
This is just one example of the funding gaps that brokers can help to fill. Smart brokers will identify this gap and help fill it, while diversifying their businesses and growing their client bases at the same time.
As economic growth improves, the opportunities for referrers will become even more bountiful.
Co-founder and managing director, Marketplace Finance