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ISCOVER
Promoted by Judo Bank
Small businesses have experienced significant disruption from COVID-19, with many turning to brokers and lenders for help in not only weathering the storm, but in seizing opportunities and supporting growth and investment. In an uncertain and fluid economic environment, accessing finance can be complicated. To give lenders confidence that a deal can succeed, it is crucial for brokers to know their clients’ businesses well and share this understanding with bankers. In this feature, partnered by Judo Bank, we outline the key steps and processes brokers need to take to help their SME clients access finance at this time.
You don’t need to look very far to see the impact of the coronavirus pandemic on Australian businesses. Movement restrictions across the country, and particularly in Victoria, have had a drastic impact on the number of people out and about, which in turn has led to drastic drops in revenue for many businesses – particularly those in retail, hospitality and tourism sectors.
While business revenues have fallen as a result of these restrictions, there are signs that this is now starting to plateau, with business owners expecting and experiencing improvements in trade as these restrictions are eased. In late August, the Australian Bureau of Statistics released its Business Impacts of COVID-19 Survey, which showed that fewer businesses reported a decrease in revenue in August, with 41 per cent stating so, down from 47 per cent in July. Similarly, sentiment was up – with 54 per cent stating they expected revenue to stay the same or increase in September (compared with 48 per cent in July). More tellingly, only 28 per cent of businesses said they expected to see a reduction in revenue for September.
In a further positive sign for the economy, revenues for over 100,000 small-business customers of Xero were up slightly by 1.4 per cent in August over the prior year. While Melbourne-based small businesses continue to be impacted by their lockdowns – with revenues down 3.8 per cent over the year prior – the recovery of businesses across the remainder of the economy has outweighed this and provides optimism that a recovery is underway.
Indeed, the unemployment rate has been reducing. It dropped to 6.8 per cent in August, down from 7.5 per cent in July, with 111,000 jobs created across the economy. Further, the effective unemployment rate dropped to 9.3 per cent from about 14 per cent at the peak of the crisis. This performance is significantly better than the 10 per cent unemployment that both Treasury and leading economists had forecast.
It’s businesses returning to employing staff and creating new jobs that will be driving the economic recovery and the demand for commercial lending in the months to come.
Notwithstanding the green shoots that are popping up across the country, given the wide-ranging impacts across the economy, it is perhaps unsurprising that one in four businesses have decreased or cancelled capital expenditure compared with earlier this year, with small businesses in particular tightening their belts.
While uncertainty about the future economy is the main factor influencing capital expenditure, concerns around access to finance is also prominent. Indeed, nearly a quarter of businesses surveyed by the ABS said that access to external finance was a key factor in their capital expenditure plans. But help is out there. Hotlines have been set up for small businesses seeking finance, the government’s Coronavirus SME Guarantee Scheme has been expanded to provide up to $1 million to SMEs that can be paid back over a five-year term, challenger banks are entering the market providing new offerings, and brokers are working hard to guide their customers through these challenging times.
Sentiment, it seems, is a large part of the issue. According to a recent Sensis Business Index, 36 per cent of the 1,015 SME managers surveyed (between 29 July to 5 August 2020) think it is getting more difficult to secure finance. Moreover, more than a quarter (26 per cent) said they actually had been knocked back for finance (rising to 37 per cent for regional businesses).
It is potentially a combination of this perception that finance is getting harder to access, combined with a poor previous experience, which may be resulting in a reduced number of businesses applying for finance. Indeed, just 13 per cent of businesses surveyed sought finance assistance, the Sensis survey found, down from 16 per cent in March 2020 and 17 per cent in December 2019. This trend seems to be occurring in both direct and third-party channels. The latest FAST Business Lending Index, for example, found that total commercial and business lending for the three months to 30 June 2020 was down 15.9 per cent from the same period last year.
FAST CEO Brendan Wright said brokers have been providing exceptional value to Australia’s business community in extremely challenging circumstances.
“Finance brokers continue to play an essential role to commercial and business clients. Small and medium businesses across the country are working with brokers to secure critical funding lines to keep their doors open during these uncertain times.”
As businesses seek funding to support their recovery and seize opportunities that are presented to them, now is the time for brokers to be engaging with their customers and wider networks and leveraging their partnerships with, and knowledge of, the lending market to steer their clients towards appropriate solutions.
The key steps
So how, exactly, can brokers secure these funding lines?
According to SME lender Judo Bank, a key part of it is ensuring brokers – and their lender partners – are working closely with their SME clients.
Speaking to The Adviser, Judo’s managing director, third party, George Obeid (Qualified Chartered Banker), explains: “Getting to know clients properly from the outset stands you in good stead to assist with lending during critical times.
“Industrialised approaches to funding are not appropriate for business’ unique needs, particularly in times of disruption as we’re experiencing now. If you have a close relationship with your clients, when the unexpected happens, you can respond quickly and tweak strategies as needed.”
Indeed, by having a close relationship with the client, the broker can more confidently outline to the lender how the proposed loans would be able to help them succeed in their goals, Mr Obeid says.
He suggests that the first step brokers should take when building a robust lending profile for their client is to “flesh out the context of the business and its key people to determine how and why lending is a viable pathway for the proposed activities”.
Once that has been laid out, Mr Obeid says brokers should then consider the client’s current and historical position as well as forecasted future performance in the proposed lending request.
“Collate all the available information to form a snapshot of your client’s position and business character, and how you foresee their future business performance,” he says.
“Present a business case that clearly outlines the purpose of funding and how the business financials will benefit.”
He continues: “When presenting a proposal, consider all of the above in the context of the 4Cs.” (See page 43 for more.)
However, the MD for third party acknowledges that not every risk can be mitigated or every question about the forward outlook answered, especially in these times.
“We know that the role of a bank is to take calculated risk, and the purpose of this analysis is to understand the risks better, not eliminate them,” he adds.
It is this understanding and specialist knowledge that sets Judo apart, Mr Obeid says.
Indeed, Mr Obeid says that the issue that causes many deals to fall over with traditional lenders is down to a lack of closeness with the customer.
“When businesses form relationships with their brokers, they in turn form relationships with lenders. At this point, human-to-human communication and common-sense decisions can replace bureaucratic processes that would otherwise leave businesses high and dry,” he says.
According to Mr Obeid, it is Judo’s approach of combining common-sense, old-school relationship banking with fast turnaround times that helps Judo Bank provide support to SMEs when they need it most.
“At Judo, we combine a forward-thinking approach with a relationship lending model reminiscent of banking days gone by, so we stand to better serve Australia’s most innovative businesses with industry-first finance opportunities.
“The scorecard or algorithm-based risk models of most big banks won’t ever replace genuine, one-to-one understanding,” he said.
Mr Obeid concludes: “We realise the services and counsel provided by brokers to Australian SMEs have never been more vital, and that requests for advice have never been greater. More than ever, business owners are turning to brokers to help them negotiate with lenders or obtain finance for future growth and innovation.
“Judo Bank is resourced to assist brokers with this increased workload and broadened scope of service, with SME-specific common-sense banking.”
A broker’s guide on assisting banks with the 4Cs of credit
Pre-industrialisation of the banking system, lending decisions were made based on the 4Cs of credit. As this model has been gradually replaced by automated systems and one-size-fits-all decision-making models, SMEs can be unduly punished by digital decision making or inflexible policies that assess risk with a broad brush, Judo Bank’s George Obeid says. He outlines how brokers can assist banks by demonstrating the 4Cs
Character
Brokers have unique insights into the quality of business management and character performance during times of both prosperity and adversity. A demonstrable history of sensible decision making, business-owner integrity and lasting dedication to success can assist with evidencing the viability of lending. By feeding this information to lenders, character assessments can form the foundation of a robust risk profile, Mr Obeid says.
“While the current environment has been challenging for many, it has provided business owners with the opportunity to innovate and find new ways of doing business. For example, we saw manufacturers and retailers pivoting to producing and supplying PPE and hand sanitizer, and cafes or restaurants moving to takeaway and dining-at-home experiences.
“Your ability to advocate for your client’s character, expertise and business acumen – including examples like these – is key to demonstrating to lenders that they are being presented with a customer who is adept at facing challenges and can continue to succeed.”
He comments: “Confidence that we’re dealing with people of integrity is key. Your assessment and examples of past actions give us additional confidence in the business owner’s ability and willingness to support their business today and tomorrow.”
Capacity (cash flow)
In a dynamic and rapidly evolving market environment, future profitability forecasting relies on deeper analysis than just past performance.
Mr Obeid says: “Knowledge of your clients’ historical data in context of real-time events helps us form a potential picture of lending success.
“As the economic environment continues to evolve, particularly as the economy recovers and government support mechanisms are wound back, we need to substantiate reasonable assumptions on your clients’ future performance and put cash flow, liquidity and capital expectations into context.
“While we’ve seen many businesses impacted by recent events, the experience in the states which have reopened has shown that many of those businesses have regained much of their lost ground. In fact, many others are experiencing outsized growth; over 20 per cent of small businesses saw revenue increase by more than 30 per cent in the early stages of COVID restrictions. Your ability to communicate your customer’s cash flow profile and ability to recover and grow is key to giving lenders comfort that a lending proposal will be a success.”
Capital
Lenders need to understand what capital is available to a business to support them in the future and how that relates to any other debt burden. As such, commentary is key in SME lending, particularly for the initial and projected capital position, Mr Obeid says.
The MD for third party outlines: “Understanding your client’s ability to navigate potential obstacles is key to assisting with a lending decision. It’s worth exploring business viability in various scenarios based on future business plans. How likely is it that funding will successfully support the intended purpose? How well are the business and customer placed to handle any deviations to that plan? And how can you substantiate this business case on behalf of your client?”
Collateral
Because banks fund against a variety of asset classes, understanding which lending scenarios suit which collateral securities is also important, Mr Obeid says.
Property, working capital, equipment, goodwill – a reasonable lender will appreciate that no asset class is completely homogenous and a detailed customer-specific analysis is essential, he says.
“You can help fill in the gaps when it comes to asset evaluation. The purpose of lending should be the starting position for a bank’s analysis of collateral support,” Mr Obeid says.
“Helping a banker understand the nature of the asset will be critical in establishing the point at which equity support or additional security might be necessary,” he outlines.
Relationships
While the 4Cs are a useful tool for brokers writing SME loans, Judo notes that this all has to be backed by good relationships between all three players: the business, their broker and their lender.
As many lenders have moved to a more distanced digital relationship with their brokers and customers, Judo Bank says that it wants to restore transparency, trusted relationships, human connection and common sense within Australia’s business lending community.
Mr Obeid says: “In more modern lending environments, automated systems replace human relationships. However, SME businesses often have a level of innovation in their business practices, and that’s when this methodology fails. Relationships are critical to lending at all points in the business cycle, particularly for SMEs.”
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