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Given their importance in all economies SME’s access to credit is essential for economic growth. However SME lending is often seen as being in the too-high-risk segment of a bank’s lending portfolio. This means SMEs are faced with restricted credit availability from bank lenders prompting them to look to diverse funding sources
Lending to SMEs can be perilous. But it is not high risk as long as the lender understands the borrower’s objectives and takes steps to mitigate the associated hazards in achieving them.
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“Therefore, a one-size-fits all approach to assessing risk is not appropriate,” says John Mohnache ff, national sales manager at Liberty Financial.
A lot too depends on the lender’s appetite for risk. “An organisation needs to work out where any individual or business sits along the risk spectrum. On this basis, one can then also determine what terms should apply to that situation,” says Mr Mohnache ff.
David White, managing director at Australian First Mortgage (AFM) agrees, and confirms that at AFM the appetite for SME lending is healthy.
He believes SME lending is not high risk, as loans are commercially driven, which effectively removes any guesswork from the assessment process.
“At AFM we ensure prudent lending is maintained via the sound credit assessment of each application,” he says.
Sound credit assessment is always about accuracy.
“Clearly there is a difference in the behaviour of the borrower classes, and one must understand these differences to assess a loan’s merits correctly,” says Mortgage Ezy CEO Peter James.
Cathy Dimarchos general manager at Sintex agrees: lenders simply need to have the skills and expertise to assess SMEs at their face value.
“We have always valued the SME sector’s contribution to our business and given that we understand them and provide quick and easy service we believe that all other lenders need to follow in our footsteps,” she adds. “In our business, mainly focusing on commercial, we have seen a very stable loan book, with almost non-existent defaults. I would say that they are definitely the polar opposite of high risk.”
Legislation
This perception (that SMEs are high risk) can be largely attributed on the previously unregulated market. But, says Andrew Littleford, managing director at Interim Finance, the introduction of the NCCP has been a game changer.
“It has perpetuated a fundamental market shift to support highly regulated professional practices and corporate business models that guarantee compliance whilst fulfilling short-term lending financing requirements,” he says.
Clearly SMEs have a hard time with the majors, says Mr James, and this conservatism has an adverse effect on the general economy. “When legislation effectively
curtailed low-doc lending, this caused a major price contraction in the property market generally, as SMEs could no longer easily obtain finance for housing,” he says.
Given the importance of SMEs, he says it’s disappointing that more consideration is not given to their unique circumstances. Perhaps, but despite the growth and success of the sector, entrepreneurs typically aren’t as diligent as they should be with their accounting affairs.
“This, combined with SMEs often requiring business related cash injections quickly often precludes financing from conventional lenders,” says Mr Littleford.
It was non-banks that initiated low-doc loans and they only became an issue once the banks decided to copy the initiative without any
margin for risk.
“This killed the goose that laid the golden egg, through a lack of understanding of SMEs and including a risk margin for this type of loan,” says Mr James.
Now, he adds, banks are more stringent with self employed borrowers generally and non-banks are able to fill this gap with a more pragmatic approach.
WHY SHOULD YOU BE CONSIDERING COMMERCIAL
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 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 it’s true that some commercial clients will want to take out home loans.
