Commercial lending: making their business your business

That nine per cent figure rises even further once you remove all the children and pensioners and others who aren’t in the market for finance. FAST chief executive Brendan Wright estimates that half the clients on a typical residential broker’s database are self-employed.

“Sticking to what they know is an option for residential brokers, but the reality is about 40-60 per cent of the loans they’re doing will probably be for self-employed people, so why not take the extra step to understand those business owners’ needs? That’s the real opportunity that is there at the moment for mortgage brokers,” he says.

“There are 2.8 million small-to-medium enterprises in the Australian economy. It’s the engine room of our economy and makes up about 85 per cent of the workforce in Australia. More and more business owners are looking for guidance about funding their business – and their personal needs need to be met as well.”

Here are eight other reasons why residential brokers should think about commercial finance, according to the brokers, aggregators and associations consulted by The Adviser.

1. Income boost

Selling a mortgage to a client is great – but selling a home loan and a business loan is even better.

2. Established client base

Brokers won’t have to look too hard to find commercial clients. A typical database will include self-employed people; a typical referral stream will include self-employed people; a typical social network will include self-employed people. Many of the same people who want home loans will also need business loans.

3. The virtue of ‘yes’

Brokers who keep saying yes to clients are more likely to earn repeat business. They are also more likely to be seen as a ‘trusted financial adviser’ rather than ‘that guy who sells home loans’.

4. Less competition

The commercial sector is less cluttered than the residential sector, which potentially means more business for the taking.

5. Risk management

Brokers who have all their eggs in the home loan basket could be exposed by a downturn in the residential market. Businesses across all industries like to spread their exposure is because it reduces their risk.

6. Exit strategy

Adding a commercial arm to a business could make it more attractive to potential buyers. More services means more client contacts, which should equate to a more valuable trail book.

7. Referral boost

Brokers love referrals. Referral partners love brokers who take care of their clients. The more ways in which brokers can look after those clients, the more attractive they become to accountants, lawyers, planners and other referral partners.

8. Two-way street

It’s true that some residential clients will also want to take out business loans – just as its true that some commercial clients will want to take out home loans.

Logical diversification play

Melbourne brokerage Stantins mainly focuses on home loans and investment loans, with only about 10 per cent of its business coming from commercial finance, says partner John Evans. However, the firm has done commercial finance from day one and sees it as a logical diversification play for residential brokers.

“You collate the same information [for a home loan] that you do for a self-employed client who is looking at buying a business premises. So it’s not a huge step from doing their home loans versus funding a commercial purchase for them,” he says.

“If you’ve got clients looking at other options and someone else helps them, then anything else you’ve done for them is going to be at risk [of being pinched by a rival].”

That’s something Goldkey Financial director Mark Golding knows all too well.

“If a residential client goes to me to talk commercial, I’m probably going to try to pinch the residential loan as well. So it’s always a good thing to keep your client as close as possible so they become a stickier client. You can also add in leasing of things like equipment and motor vehicles if you wanted to go a bit further,” he says.

Mr Golding says while it’s not common for him to turn a residential client into a commercial client, it’s not unusual either. “If you said it was only 10 per cent of your residential client base that had commercial borrowings, it’s still a reasonable market, so it’s worth considering,” he says.

Mr Golding is a 20-year commercial finance veteran whose business is about 65 per cent home loans and 35 per cent business loans. He points out that commercial has more in common with residential than some brokers believe.

“You’ve just got to understand that instead of being able to borrow up to 90 per cent or 95 per cent with mortgage insurance, there’s no mortgage insurance available, so you’re usually restricted to somewhere between 65 and 75 per cent,” he says.

“Any residential broker should be able to do a commercial loan – and if they can’t, they probably shouldn’t be in the game. There’s not a lot of difference between doing a home loan and a commercial loan. It’s just a product. There are a few tricky bits in a commercial loan, but it doesn’t take long to work out. Once you’ve done a couple, you’ll work it out quickly, and most BDMs can help a broker get through any minefields.”

Residential vs commercial

Loan Market Sydney broker Alfred Buttarelli is another veteran of commercial finance. Although it only makes up one-third of his business, he has been writing commercial loans for 15 years. He says the difference between working in residential and working in commercial is a bit like the difference between being a GP and a specialist. However, he believes that there is a genuine opportunity for brokers to add a commercial arm to their business – provided they’re willing to learn.

Mr Buttarelli says most of the commercial clients he deals with are business people, because there are now few investors in the market.

“The main reason is that there’s not much capital appreciation on a commercial property, whereas they’ve seen the capital appreciation from a residential point of view has been astronomical, so most of the investors have moved into the residential market. There are a lot of opportunities for business owners who are looking to capitalise from buying their own premises,” he says.

Red Finance director Peter Smith derives about 65 per cent of his volumes from commercial finance – although the former commercial banker says he would make it 100 per cent if he could.

“Residential frustrates me because the commercial rules and regulations have a lot more market sense, whereas residential – because it’s all cut and dried and tick a box – there’s no room for anything other than black and white. You talk to commercial lenders and it’s a lot easier to structure in a deal that can work for everybody not just the bank,” he says.

Mr Smith says residential and commercial share the same fundamentals in that both types of finance involve identifying the borrower’s cash flow and how the loan can be repaid. However, following a commercial paper trail involves more than just the payslips and tax statements that a home loan broker might be used to, he adds.

“You can’t do that with a self-employed person who’s running their own business or who is a property investor and is buying another commercial property. You’ve got to get leases on the commercial property, you’ve got to get tenancy agreements. Valuations are often 10 days and they’re limited to who can do them, because the price of a property is worked out on the yield rate and the rent and nothing else. It doesn’t matter what the land is worth. So it’s not an easy process,” he says.

The case against

Not all brokers see the need for commercial finance. Review Mortgages principal Stephen Boland says he has no objection to writing commercial loans but that his clients have rarely demanded this service since he became a broker in 2002. “I don’t come across it too often. There’s just no need in my role here to do it. I’ve toyed with it once or twice, but it really hasn’t progressed at all,” he says.

Ocean Home Loans owner Brad Kirwan says he is wary of distracting himself from home loans, which are his bread and butter. “There’s enough to know about residential lending without complicating it with commercial lending. It’s like that old saying – you’re a jack of all trades and an expert in none,” he says.

Finance Seekers director Damon Church says he’s looked into commercial finance, and even prepared quotes, but that none of the deals have ever materialised. “The people who I’ve had come to me are first-time developers, people who don’t really understand what it’s like in the commercial world, so when you get the information you need either they don’t qualify or they find it’s too expensive or difficult and pull out,” he says.

The most recent commercial deal Mr Church considered was for a client who wanted to buy a go-kart business off his boss. He says he spent several hours ringing around but couldn’t find a lender who would finance the deal.

Still, Mr Church hasn’t closed his mind to commercial finance. “I’m not going to turn customers away – you’ve got to do what you can to help them – but at this stage I don’t have a plan to get into that arena. If they fall in my lap, I’ll do what I can to help them, whether that’s a referral or something I can do myself. But I’m actually really busy at the moment, so it’s not something I’m chasing,” he says.

Tips and warnings

Some brokers do commercial finance; some brokers don’t. Some brokers are open to the idea of diversifying into commercial finance; some brokers aren’t. ING DIRECT’s head of third-party distribution, Mark Woolnough, captures the divide well: he describes commercial finance as a “mindset challenge”.

Mr Woolnough adds that the small commercial market in which ING DIRECT specialises is not too dissimilar to a residential application or a residential relationship.

“For a broker accredited with ING DIRECT, their accreditation allows them to introduce both residential and commercial; it’s generally the same application form, it’s the same serviceability calculator, and that will make it as easy as possible for them,” he says.

“But sometimes when you mention the word ‘commercial’ to brokers, they think of the large commercial deals. But there are mum-and-dad investors looking to diversify their investment portfolio beyond just residential property. And self-employed clients looking to either move into their own premises rather than rent. In fact, in many instances the market is seeing self-employed proprietors looking to move their premises into an SMSF solution which is then leased back to them.”

FAST chief executive Brendan Wright says opportunities abound for residential brokers who can overcome the “mindset challenge” presented by commercial. He makes two important points. Firstly, an increasing amount of commercial business is being written by the third-party channel. Secondly, it’s becoming harder for business owners to find finance professionals who can meet their commercial, residential and investment needs.

“Business owners live and invest in houses too. There’s a significant opportunity here for brokers, because more and more commercial brokers are switching on to residential. In years gone by, they let that go to other parties, but they’re now deciding to leverage their large commercial client base to meet their personal home loan and home investment needs,” he says.

However, neither Mr Woolnough nor Mr Wright – nor the MFAA or FBAA – pretend that diversifying into commercial is a quick and painless process. All urge caution and emphasise that hard work is required. Here are their six tips and warnings.

1. Back to school

Brokers need to educate themselves about commercial products, commercial customers and the nuances of the commercial market. One tip is to form a mentoring relationship with an experienced commercial broker. Aggregators, associations and lenders are also willing to help.

2. New script needed

Start asking different questions when assessing new clients. Brokers need to find out if clients are self-employed and then explain how they can help those clients grow their businesses.

3. Lender rules

Commercial accreditations are harder to earn than residential, because lenders demand higher standards with business loans than home loans. Different lending rules also apply and remuneration can be different.

4. Forewarned is forearmed

Commercial deals are generally more complicated and protracted than home loans. The financials can be harder to understand – think balance sheets, business plans, trusts, multiple directors and multiple entities.

5. Return on investment

Mastering the intricacies of balance sheets can seem daunting. But it will be time well spent for brokers if they themselves are self-employed.

6. Not for everyone

Ultra-successful home loan writers may find that focusing on residential is the best use of their time. Brokers who aren’t willing to make a real commitment to commercial may also be best advised to stay away.