The perfect solution

The possibilities for brokers to offer multiple lending products bode well for the third-party channel. Short-term solutions for SMEs is one segment clearly rising with the tide.

Short-term lending

Prime Finance founder and managing director Merrick Malouf has been in the lending business for 20 years. He established Prime Finance back in 2004. The group offers a range of loans including second mortgages and commercial finance up to $1.5 million. Settlements typically take between three and seven working days.

“We do a lot of residential bridging finance, 60-day short-term loans for residential property,” Mr Malouf says.

“Our clients are primarily SMEs and customers moving from one property to another and are looking for bridging finance. We are finding that as the banks are tightening up a bit we are seeing greater demand for people needing bridging finance over the last six months. We have specifically targeted brokers and let them know that this is a space we are playing in quite heavily right now.”

Australia’s booming commercial lending market, together with cheap funding, has been kind to this Sydney-based group. According to Mr Malouf, last financial year was the best in Prime Finance’s history.

“We are on track to keep that going this year, due to our interest rate of 1 per cent a month. We have taken our business loans right down from 3 per cent to 1 per cent. We made that change last year and are receiving a huge amount of volume. Our loan volumes nearly doubled last financial year,” he says.

Prime Finance is a private lender with access to family trust money. They also have a number of large private investors. An environment of record-low rates has kept a healthy pipeline of funding as investors seek out better yields beyond the banks.

“There is strong demand from private investors where the banks are offering such low returns. It works better for investors to put their money into short-term lending than to put it in the bank,” Mr Malouf explains.

The lender works with over 5,000 mortgage brokers and solicitors. Unlike a bank, the group does not deal with customers directly, so intermediaries are its sole distribution channel.

This has allowed Prime Finance to gain a deeper understanding of broker businesses over the last 12 years. Education is a big part of the company’s ethos.

“We sit down with brokers, visit brokerages and even fly interstate to do seminars. We go through applications and help brokers understand how short-term lending can help their clients,” Mr Malouf says.

“The main thing I say to brokers is align yourself with a genuine private lender. There are only really a handful of private lenders who have access to their own money.”

With the strong demand from SMEs benefitting his own business, Mr Melouf understands why residential brokers are becoming increasingly eager to jump diversify their offerings.

“I feel sorry for the resi brokers because they’ve been squeezed over the last couple of years and they are getting squeezed again. Once somebody gets squeezed in their own business they’ve got to look for other income streams and we’re finding that since about 2011, but mainly over the last 18 months, resi brokers are trying to enter the commercial space,” he says.

The online players

Commercial lending tailwinds have coincided with the birth of a new breed of lenders who offer short-term funding via online platforms.
Westpac’s venture capital fund, Reinventure, invested in online SME loan broker Valiant earlier this year.

Former McKinsey consultant Alexander Molloy and his partner, ex-investment banker Ritchie Cotton, launched the platform in 2015 in an effort to address what Molloy calls “the deluge of online lenders hitting the market”.

“The feeling we got coming out of that was one of confusion,” Mr Molloy says.

“How are all these offerings different? How are they going to carve out a niche for themselves in the market and how are they going to communicate that difference in their value proposition to their consumers, and the channels that they use to reach those consumers?

“We thought there was space to create a tool to help people on both sides of that conversation understand this explosion in the number of non-bank offerings.”

The platform effectively acts as a comparison engine for Australia’s online SME loan providers. The details of a deal (amount required, available docs etc.) are typed in and generate a shortlist of potential lenders. Rather than submitting an application with multiple lenders to see where the deal might fit, the platform narrows down eligibility in a matter of minutes. The platform hosts a panel of 26 lenders including Prospa, Moula, Spotcap, Kikka Capital, Marketlend, ThinCats, Timelio, Banjo, InvoiceX, GetCapital, MaxFunding, Crown & Gleeson, Earlypay, Business Fuel and Capital Finance.

The group has partnered exclusively with Yellow Brick Road-owned mortgage aggregator Vow Financial. Vow brokers can now see in minutes whether their clients would be eligible for a wide range of short-term secured and unsecured loans.

Yellow Brick Road Group CEO of lending Tim Brown says the new partnership is validation of the group’s commitment to its broker partners.

“Valiant has an innovative platform that does not exist in the market right now. Everybody wins where there is a strong match between a borrower and lender.

The platform will save time for Vow finance brokers and their clients, as well as minimise the risk and anxiety of loan rejection.”

In addition to a welcome cash injection, Westpac’s $50 million VC fund supplied Valiant with some savvy mentors: Reinventure’s co-founders Simon Cant and Danny Gilligan. The fund was an early investor in SocietyOne, Australia’s first P2P lending platform. Not surprisingly the Reinventure team has plenty of experience in the online lending space and with Westpac as the fund’s largest investor, Valiant has been receiving plenty of guidance.

“We tap into them and use them as a sounding board for ideas on how to grow and what are next steps are,” Mr Molloy says.

“It goes beyond funding. It is very much a mentor relationship as well.”

Feedback from brokers and financial advisers has been positive. Neither require too much hard-selling on the value of a free service that can help their clients. The challenge for Valiant, as is the challenge for most new additions to the lending space, is being front of mind when a small business owner visits their local broker.

Firmly established

Like Prime Finance boss Merrick Malouf, HomeSec Business Finance director Paul Stone opened his doors in 2004. But unlike the new online platforms, his business is tried and tested and managed to survive a tumultuous 10-year period that saw many smaller lenders leave the industry.

“We are one of the few short-term lenders that have traded continuously through that time. Others have come and gone and come back again,” he says.

The offering is simple: one secured short-term loan product.

“We lend Australia-wide, both regional and metro. Our loan amount ranges from $20,000 to $2 million. The loan term from 1 month to 6 months. Our main claim to fame is our speed. We are typically able to settle a short-term business loan within 24 hours. Sometimes it falls within 48 hours, only because borrowers do need to sign the loan contracts in the presence of their solicitor,” Mr Stone says.

HomeSec typically lends to micro and small businesses and certain sectors have their days in the sun. Right now Mr Stone is seeing an upswing in the building industry.

“Particularly your average self-employed tradie who may have taken on a new contract and needs $100,000 to buy building materials. Or in some cases just hasn’t been paid yet form the last major job they have done.”

The overwhelming majority of the lender’s traffic comes from brokers. While HomeSec does deal with some customers direct, Mr Stone says they prefer to lend through the third-party channel.

Education is a major part of the company’s philosophy and Mr Stone believes a key point of difference is having the time and the experience to train residential brokers to write short-term loans for the first time.

“Short-term business lending is very simple,” he says. “There seems to be a myth that it is high cost and prohibitive. There is so much evidence and so many examples we have where we’ve saved customers had they not had access to quick funding. Or examples of businesses that have succeeded after obtaining the funding they needed for growth.”

HomeSec accredits all of its loan writers and currently boasts a network of 660 individual brokers.

The biggest challenge the group has found through working with finance brokers, Mr Stone says, is that they are focused on rate, rather than finding a solution.

“There are two types of brokers. The rate-focused broker looking to get the cheapest deal for their client, which is great. But if you are a broker that is looking for a solution to your client’s problem, then rate doesn’t necessarily feature as a number one priority. Finding a solution for the client does,” he says.

“Often in short-term business lending we find the broker gets a bit scared by the rate, because it is short-term and priced accordingly. Brokers freak out a bit and worry that their client will also freak out, which could make them look bad. But what they are actually doing in that instance is denying their client a solution.”

HomeSec looks to educate brokers through its online video series, which offers tips on how to have a conversation with a client about short-term solutions.

“It’s important to let the client make up their own mind. Don’t make up their mind for them,” Mr Stone says.