New revenue streams: vehicle and equipment finance

If, however, you’re the sort of broker who hates clawbacks, who loves fast settlements and whose clients have a funny habit of holding a driver’s license, it might be time to consider adding vehicle and equipment finance to your business.

Take a typical deal for, say, a $30,000 Holden Commodore. It should involve no more than two hours of work from an initial client discussion through to settlement.

The deal will be turned around in one or two working days. The broker will then receive whatever brokerage fee was agreed with the client – usually two per cent.

So that’s $600 commission that will quickly find its way into the firm’s bank account. And it doesn’t matter if the client sells the vehicle a few months later, because there are no clawbacks with this sort of finance.

Broker success stories

A competent residential broker should have no trouble getting on top of vehicle and equipment finance, according to Lending4U managing director Justin Delanty.

He became familiar with the sector while at the Commonwealth Bank, so it was a “no-brainer” to offer it when Lending4U was founded in 2010. Vehicle and equipment finance now represents about 15 per cent of the Tasmanian firm’s business.

“It’s a simpler process than doing a home loan. You’re providing similar sort of information – name, address, phone number, what they do for income, a couple of recent payslips, and their asset and liability position – but the finance is turned around a lot quicker,” Mr Delanty says.

“You can earn some pretty good money out of it and you can turn loans over very quickly. All home loan clients have different financial needs, and people want to buy cars.

It’s something that families and businesses do on a regular basis. If we’re providing their home loan and we’re a trusted adviser, why wouldn’t they trust us to do some vehicle finance for them?”

Chris Azzi, a Loan Market broker from Sydney, has a textbook before-and-after story to share. He started broking in 2009, but it wasn’t until 2011 that he diversified into vehicle and equipment finance.

“We started getting a few clients who were very interested in vehicle finance. I had a good relationship with my local branch manager who I referred that business to.

But we reached a point where we realised we were losing all that commission and control of the client to a bank. So we made the decision to get accredited with a range of lenders,” Mr Azzi says.

“Equipment finance has been an increasing trend for us. We never got into it as vigorously as we did with vehicle finance, but once we started getting a lot of construction clients coming on board, we started financing cranes and forklifts. In the last 12 months, that’s nearly tripled for us.”

Mr Azzi says vehicle finance now accounts for about 13 per cent of his volumes, while equipment finance represents 8–10 per cent.

Lender landscape

Josh Egan from Astute Financial Melbourne City South recognised early in his career that vehicle and equipment finance would help him develop stronger client relationships.

It means he can offer a “total solution” to all his clients, he says, whether they’re residential clients who want to buy a car or commercial clients who need some equipment for a manufacturing operation.

“As with any type of lending, you will come across a range of deals from the difficult to the non-complex. However, one feature of this market segment in recent times is that lender policy is evolving and the credit decision process for business-related transactions is becoming more streamlined,” Mr Egan says.

“That said it’s very important to understand the basic fundamentals that are unique, including product type, pricing, quoting, title flow, systems and lender policy.

The latter, in particular, varies between lenders and the ad hoc way they are communicated can make it difficult for the inexperienced to make a quick assessment on an appropriate option for your client.”

Dealer competition

Cliff Ferrer from 1st Street Home Loans is quick to list a range of benefits that come from diversifying into vehicle and equipment finance. They include extra revenue, increased client loyalty and less paperwork compared to a home loan.

However, just like other brokers who work in this sector, he points out the stiff competition provided by car dealerships.

“The biggest challenge is probably the competition you have when they walk into the dealer.

The dealer has the power to ask ‘Do you want the car now?’ It might cost them $5 more a month, but they can sign and drive away in a car,” he says. Mr Delanty advises brokers to work fast in order to minimise the time the dealership has to speak to the client.

Brokers also need to be aware that dealers get to play by house rules, he adds.

“For example, most dealers will not allow our client to pick up their vehicle until the finance has been funded into their account, which is fair.

But if they do their finance through their own dealership, sometimes the client is able to take the car before the finance is confirmed.”

What the lenders think

Macquarie Leasing’s national manager of aggregation, Stephen Light, says fierce competition is just one of the downsides of vehicle and equipment finance.

Deals can sometimes be complicated and transactions are usually much smaller than a mortgage, he adds.

“Also, they can involve more work in the sense that once brokers submit the application they are responsible for processing it all the way through, including chasing the supplier for invoices, signing the customer up and dealing with the lender at settlement.”

However, Mr Light believes the pros far outweigh the cons.

“Not only does it protect your client from other brokers or banks, it’s great for cash flow because you get your income upfront. If you do one or two cars per month, you’d get an extra $2,000 or so to tide you over.

That’s especially good for new brokers as they build their trail book,” he says.

“Everyone needs a car. The sector includes both commercial and consumer finance, so you’ve got your whole database covered.

Brokers should be proactive: let your clients know you do car finance rather than wait for them to come and ask.”

Pepper Asset Finance’s head of sales and distribution, Craig Edwards, tells brokers they could have an “untapped opportunity right under your nose” through their pool of home loan clients.

“But developing this opportunity takes time and expertise. You may need to hire someone with the expertise required to drive this business,” he says.

“A residential lending broker may want to focus on motor vehicle finance, which is usually more ‘vanilla’, than financing equipment and other assets, which generally have a higher level of complexity.”

Mr Edwards says brokers also need to ask themselves some big-picture questions.

“Can this be a viable, ongoing new business stream for you? What are the needs of your clients? Do these needs go beyond motor vehicle finance?” he says.

“Brokers should also ensure that they meet all credit licensing obligations.

If the broker is currently aligned to a residential lender who also has a vehicle and equipment finance business, they can seek information and advice from them too.”

Vehicle and equipment finance adds up

FAST chief executive Brendan Wright says vehicle and equipment leasing is one of the easier ways for a broker to diversify their business and increase revenues

Why should brokers diversify into vehicle and equipment finance? Why not just stick to home loans?

While residential lending remains a profitable business area, asset finance services, such as vehicle and equipment finance, help brokers build more diverse revenue channels and capitalise on opportunities that might be right in front of them. Many broker clients are small business owners looking for additional services, so it’s an easy but effective way to create long-term clients.

How challenging is vehicle and equipment finance? If a broker can do residential finance, should they be able to do vehicle and equipment finance?

Vehicle and equipment finance is quite straightforward and is a great first step for brokers looking to diversify their income streams. Certainly, it requires some effort and specialist training, but if a broker can competently write home loans, they should be able to write equipment and vehicle loans too.

What steps should a broker take if they want to diversify into vehicle and equipment finance?

Diversifying into a new area of business is all about building your knowledge base and accessing specialist training. It is important to take time to learn the ropes to ensure you offer a high level of product knowledge. One great option is a referral model with a more experienced asset finance specialist, until you’re more comfortable with the products and processes.

What are some of the common misconceptions you hear from brokers about vehicle and equipment finance?

Many brokers are surprised at how easy vehicle and equipment finance actually is, once they take the first steps to integrate these services into their proposition. My advice to brokers who are considering making the move is to give it a go. It’s a fantastic opportunity and a relatively easy way to strengthen your revenue streams.

Buyer beware

Why would a car buyer organise finance through a broker? After all, isn’t it easier just to let the dealership take care of everything?

Yes, it may be easier, but it will probably be more expensive as well.

And while it would be wrong to suggest all dealers are untrustworthy, many brokers are convinced that a significant number use high-pressure sales tactics.

The FBAA made a similar point in September when it released a statement warning car buyers to be careful when financing their vehicle through dealerships.

Chief executive Peter White said members have reported examples of dealers financing cars that customers cannot afford, leaving them thousands of dollars out of pocket.

Mr White added that the practice appears to involve large franchise motor groups as well as small dealerships.

“It seems many dealerships misunderstand the lending requirements under NCCP and believe they are exempt from all of the act’s requirements, which they are not,” he said.

“They are taking advantage of a grey area of the act by not abiding by responsible lending obligations, and often they have unqualified people writing the loans.”

Mr White said “zero per cent finance is not a good deal” because customers are “paying over odds for a car which will be worth less than their loan in two years’ time”.

His warning came after ASIC issued an infringement notice against a Sydney car dealer after finding “reasonable grounds” it had contravened provisions of the NCCP.

“Motor dealers may not be providing customers with a credit guide, not disclosing commissions and we have seen some clear examples of them not meeting responsible lending conduct obligations,” he said.

Brokers or bust for businessman

Bob Greenup, who owns the Sydney CBD franchise of Business Networking International, reveals that he learned the hard way to use brokers for vehicle finance.

Why do you use a broker to organise your vehicle finance?

Having access to that insider knowledge makes it a no-brainer. You don’t want to spend $50,000 on a product and not give yourself an edge by using someone who does this sort of thing every day for a living.

Why not place your faith in the car dealer?

The car dealer doesn’t operate in your interests. Their role is to maximise their profitability, and when they’re giving you the finance as well as the product, they’ve got the edge. But when you go to a broker, you’re using someone who is looking after your interests. You need somebody representing your interests.

How many times have you gone with a dealer and how many times with a broker?

I’ve gone three or four times through a dealer and I’ve organised finance twice through a broker. I wouldn’t think about using a dealer again. I feel much more in control when ‘my people’ are doing the negotiating from a position of knowledge and experience.

What were your experiences like with a dealer?

When you sit with a dealer, they’re always asking you whether you’d like this option or that option. They put you on the spot and ask you to make important financial decisions. You don’t have the opportunity to do research, because you’re sitting in their office.

You’re coming from a poorly informed background because you don’t do it often, whereas the broker deals with that sort of thing every day. So the broker has a much stronger negotiating position and can advise which options you should and shouldn’t accept.

You can then comfortably make a decision, because you know the person you’re getting that advice from is working for you and not for them.