As the end of another bumper financial year fast approaches, many SMEs will be thinking about their finances and position for the year ahead. In this feature, we take a look at how the SME market has been sailing smooth waters
Amid rising costs of living, two years of uncertainty and lockdowns fueled by the pandemic, as well as banks tightening their lending criteria, it may come as no surprise to hear small to medium businesses have copped some challenges over the past few years.
Considering SMEs account for more than 97 per cent of all businesses in Australia, governments and banks worked in partnership to help businesses through to the other side of this global challenge, by deferring loans and providing a wide range of stimulus packages.
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Due to a combination of the instant asset write-off scheme (enabling the purchase of vital equipment); Homebuilder (which spurred investment and kept the largest small business sector—construction—busy); the Australian Business Growth Fund (investing in SMEs); and the SME Loan Recovery Scheme (providing cheap credit to those who needed it), many small businesses emerged from lockdowns stronger than ever.
As such, rising numbers are now looking to take on credit through the broker channel to grow and bed down on this position of strength.
Indeed, in its 13th edition of its Industry Intelligence Service Report (IIS), the Mortgage and Finance Association of Australia (MFAA) revealed that a record number of brokers are now writing commercial loans, with a new record value of settled commercial loans also being reached.
The report, which draws on data supplied by 11 leading aggregator brands for the six-month period of 1 April 2021 to 30 September 2021, found that the value of settled commercial loans written by brokers has hit its highest level yet, reaching $13.4 billion, according to the MFAA.
This was up approximately $4 billion (or 42.92 per cent) compared year-on-year.
Period-on-period, the value of commercial loans settled by mortgage brokers grew by just over $3.13 billion, or 30.46 per cent, from $10.27 to $13.4 billion.
Moreover, the number of mortgage brokers also writing commercial loans through their aggregator panel is ever increasing, reaching a new high of 5,268 in the April-September period. This was up by more than 700 brokers than in the same period last year (when it was 4,539 brokers).
Approximately 28.8 per cent of mortgage brokers now also write commercial deals through their aggregator’s panel.
What loans are brokers writing?
Government packages and the low cost of debt were a recipe for success for commercial property investment, according to James Kelder, at Green Finance Group.
Queensland’s recently crowned Best Finance Broker (Better Business Awards 2022) told The Adviser that many of his small-business clients “took advantage” of government assistance potentially placing them in a better position than previous years.
“Having the cash and then having cheap debt, stimulated a lot of commercial property acquiring over that period,” Mr Kelder said.
He said many businesses were purchasing commercial property that they operated out of, or investing in commercial property.
“A lot of that cash is still sitting there. And debt, at least in the commercial market, is still very cheap. I think that trend will continue to play out for some time,” Mr Kelder said.
And while supply constraints continue to hinder Australia’s SME businesses, many have been getting their orders in for equipment and machinery in preparation for the future, according to the Commonwealth Bank of Australia.
CBA’s data revealed equipment and machinery financing went up “significantly” in the first six months of the financial year 2022 compared with the same period in FY21 (up 87 per cent) and was up 86 per cent when compared with pre-pandemic FY20.
These were also largely driven by government incentives, such as the instant asset write-off, which was extended last year to continue until 2023.
Banks providing more funding
Despite the period of recovery post-pandemic, 2022 is posing its own challenges. With inflation now at 5.1 per cent and the cash rate on its upward bend, preliminary data from analytics and credit reporting company Equifax has nonetheless found that business loan applications went up in March 2022 quarter (11.2 per cent).
While there are expectations that the market might be “leveling out”, the lenders are stepping up to help SMEs (and their broker partners) to access finance quickly.
For example, Mr Kelder said banks are providing more funding towards commercial property purchases than in the past. According to the finance broker, the LVR ratio, between 65-80 per cent, is a relatively “fluid concept” and borrowers can secure 100 per cent of funds when there is a “personal guarantee” or “business support”.
“Some banks have used the adoption of government backed lending to help bridge that shortfall,” Mr Kelder said.
Another trend that has helped brokers service business loans faster is due to the fact that many lenders are simplifying assessments, such as accepting self-declared finances and BAS statements.
Mr Kelder said a number of banks – including ANZ, CBA, NAB, Macquarie Bank , BOQ and Suncorp – have started offering simplified assessments isolated to the business itself, with quick turnaround times.
“Both NAB & CBA also have unsecured small business loans based on account turnover or BAS assessments,” Mr Kelder said.
He said the benefit to borrowers is the “expedited assessment” and less red tape.
“BAS assessments provides for adoption of near term position whereas financials are static – so if the business is on a growth trend it can make attaining lending easier,” Mr Kelder said.
This fast-tracked process has provided brokers with wider access to debt solutions for small business and enabled brokers to write more commercial business, too.
Why brokers are important in SME lending
In an increasingly competitive market, and with small-business owners finding their time ever more constrained, brokers are becoming more and more popular with SMEs to help them with their debt solutions.
Mr Kelder said brokers’ “speed” and “expertise” in the market are particularly beneficial for SME owners, particularly as the differing terms at the lenders can be “quite considerable” for commercial lending.
“With brokers you have a direct conduit into a bank so it’s much easier for a broker to make some calls and get multiple terms and banker contacts much easier,” Mr Kelder said.
“You’ve got someone that has access to a full market solution, so not only do you get quicker turnaround times at an existing bank to find the right expertise, but then it’s much easier to find competing offers and find out what the best terms are.”
In a changing economic environment, brokers will be ever more important to help SMEs access finance, grow and navigate any potential bumps in the road to come.
