Broking beyond home loans

NAB’s Commercial Property Index rose two points in the third quarter of 2014 – its first positive read since March 2011.

And while property-related transactions are part of the commercial finance market, the needs commercial lending can support are so much broader.

A quick look at the volumes of The Adviser’s inaugural Commercial Business Writers 2015 ranking will no doubt turn you on to the bottom-line benefits of this growing sector.

We’ve broken the report down into two sections: commercial finance, namely commercial property deals; and business finance, which includes everything from SME lending and debtor finance to asset and motor vehicle loans.

Everyone knows residential loans are going gangbusters right now, so as you make hay while the sun shines, it may be a good time to check out the commercial side of things.

According to ABA Finance Broker of the Year 2014 and managing partner of Wells Partners Greg Wells, lenders are now gathering more detailed results from their books that indicate brokers are generating an increasing amount of commercial business.

“They’re getting more accurate data showing the quality coming out of the third-party channel, the average loan size, the cross-sell, the new-to-bank client; all these things are key profit drivers for the banks and they’re being monitored a lot closer,” Mr Wells says.

“The banks understand the evolution of the broker more and more.”

Evolution of the broker

Unsurprisingly, commercial lending is dominated by the majors, with a few regional players, like Bank of Queensland, hot on their heels.

After a record year of profits for the banks, coupled with the Financial System Inquiry’s bid to boost business lending, all signs are pointing to a hot proposition for brokers.

“I think commercial is probably hot at the moment because all the banks are trying to grow their balance sheets,” says Discovery Finance director Jayden Vecchio.

He wrote $87 million in commercial loans in 2013/2014 across 24 deals.

“I think the big four in particular understand the value brokers who play in the commercial space can bring to them,” he says.

Pub financing specialist Daniel Green of Green Finance Group agrees that the banks are keen to grow their commercial loan books.

He should know – his brokerage took out the second and third positions in our top 10 business writers ranking with combined volumes of $144.7 million.

“I just think all the banks are holding onto a lot of cash and all I can put it down to is that the residential market is cooling, they’re sitting on a heap of cash at the moment and conditions are ripe for them to lend to commercial clients,” says Mr Green.

“You can get some big licks of money out there at the moment,” he adds.

The spotlight on residential property often leaves the sheer scale of commercial finance – and its opportunities – in the shadows.

But don’t underestimate the size of the market or your ability to capture commercial clients.

FAST chief executive Brendan Wright told The Adviser that when you look at the numbers, commercial lending is a compelling story.

“We’ve got 2.8 million SMEs in Australia,” Mr Wright said.

“These businesses are the engine room of our economy and their owners are generally motivated, intelligent individuals who care about their financial future,” he said.

“They are crying out for the kind of specialised service that only a broker can provide.”

Mr Green recently wrote two transactions worth a combined $200 million.

That’s a good way for a bank to get their cash out the door if they’re just sitting on it, he says, adding that low rates are fuelling commercial loan demand just as much as they are residential mortgages.

“My last two commercial deals were as low as 4.65 per cent,” Mr Green says.

“The dearest deals we’re doing at the moment are in the low fives but a lot of that is on the back of the volumes we’re putting through the banks,” he says.

“I recently had a client who’d gone to one of the majors for a $10 million deal. He was quoted at 6.35 per cent and I managed to get that priced through another lender at 4.74 per cent, and, again, that’s off the back of the volumes we are doing.”

Brokers are starting to recognise the huge opportunity commercial presents.

Mr Wright sees this as a combination of factors.

“Clearly, the message is filtering through to the industry that commercial is a great opportunity,” Mr Wright says. “But I also think it’s an indication of brokers’ increasing appetite to grow their businesses and develop a more holistic product offering. We see enormous opportunity for brokers to become more of a one stop financial shop for their clients.

“Commercial and asset finance are an obvious way for brokers to expand their businesses.”

Diversification is one of those words or phrases like ‘value proposition’, ‘convergence’ and, more recently, ‘vertical integration’ that get thrown around a lot in this industry.

The bottom line is it makes sense to broaden your service offering with your existing client base.

Many existing home loan clients are self-employed or small business owners so it’s logical to tap into this opportunity.

How to: commercial lending

The first obvious advantage is a significant boost to your income.

The addition of commercial finance options provides a great way to diversify and boost your revenue streams and ensure a more stable cash flow. It’s also a fantastic way to better service your client base.

Meeting more of your clients’ needs strengthens the relationship as the number of touch points between you and your client increases with the addition of new finance deals. It also helps hedge against the risk of losing a client to another broker or group.

Every mortgage broker is different and every broker’s business and aspirations are unique, Mr Wright explains.

“But diversifying into commercial lending is generally quite a good fit for many residential brokers,” he says.

“It’s not a huge leap from residential lending and it can actually support a broker’s existing residential business.”

However, it requires a commitment from the broker to want to diversify and learn a new product stream.

Adding a commercial offering certainly requires training, but just how much will depend on how a broker chooses to take their first steps, Mr Wright says.

“Support from your aggregator with commercial lenders is essential,” he says.

“If you have access to a good BDM, they can be a key resource for product support, training and strategic planning.”

A referral model with a more experienced commercial or asset finance specialist can be a good first step for many brokers, offering an introduction to the area and reducing the amount of training required.

Finding clients

“The best thing a resi broker can do is affiliate him or herself with a good commercial broker and split the commissions,” Mr Green says.

“If a residential broker is good at what they do, stick to that and come up with some sort of agreement or an alliance with a commercial broker who specialises in commercial lending,” he says.

Partnering with an existing commercial broker is a great way to learn the ropes, split commissions and get comfortable with commercial lending procedures.

But you can also start out by looking in your own backyard – ask your existing clients if they require any vehicle finance, help with their business loans or funding for commercial property.

And don’t be afraid of wearing out a bit of leather.

Mr Vecchio has only been a broker for two years. At first it was plenty of doorknocking and grunt work, he says.

“That’s what you have to do when you start out,” he says.

“Now I’ve built some networks and I associate with the right referrers but it’s all about changing with the market.”
For Mr Wells referrals are key. Often in areas you wouldn’t expect.

“We’ve always looked at the accountancy area as they are a key influencer in a client’s decision to take up finance,” Mr Wells says.

“The accountants are fielding the initial enquiry, be it financing for a commercial property or even a car and what we are doing is sales coaching the accountancy firms to then provide the leads to us and to see if we can come up with a good solution that is competitive against what they may be looking at,” he says.

“Accountants like the idea that they can access finance expertise in people like Wells Partners who can provide their clients with choice.”

The free service saves the client time and money from shopping around, and from the accountant’s perspective, it creates a one-stop shop.

Most accountants now realise that if they’re just crunching out tax returns, that’s yesterday’s method of accounting, Mr Wells says.

“The future of accounting is a very broad-based activity, much like broking, so the more products and services they can offer their clients the stickier the client is to the firm,” he says.

How to: business lending

Business lending is a different animal.

Brokers would ideally move into commercial property deals and get comfortable with them before venturing into SME lending and debtor finance.

But in terms of finding clients, the same deal applies.

“I think for brokers it’s initially about mining their existing customers,” says Peter Langham, chairman of the Debtor and Invoice Finance Association (DIFA).

“Simply look at their balance sheet: do they have trade debtors on their balance sheet? If they do, then talk to a specialist – it’s all about mining that existing customer base,” Mr Langham says.

“I think far too many Australian businesses are willing to use their personal assets, like the family home, as security for a business facility. If we can get them to use the business assets to fund the business that frees up the personal assets and that means they can build their own personal net worth – they can go and buy that investor property.

"It’s not all tied into one and the knock-on effect is the broker can say, ‘I’ve done your home loan, I’ve done your business loan, go and grow your own personal assets’,” he says.

Once you’ve diversified your business, have a growing client base and are comfortable with commercial, you have two growth options – cover all bases or specialise.

Some brokers write any commercial and business deals that come their way, eager to get the deal done and, more importantly, put a ring around their clients by servicing all their needs. If not they’ll walk.

Others like Mr Vecchio, based in Brisbane, believe in sticking to a niche.

“If you’re a great resi writer and you’re very good at investor loans, then maybe commercial’s not for you,” he says.

“A broker needs to ask themselves ‘How is this going to add value to my clients?’

“To do commercial well you have to specialise in an area, you have to offer more value-add than just doing the finance.

“If you’re doing construction and development you need to give more advice than just getting the loan through, you need to look at cost structures and those kinds of things too.”

Asset and vehicle finance

Peter Schroeder of Mildura Finance made the grade this year as our number one business broker, writing $167.3 million across almost 3,000 deals.

Mr Schroeder’s main focus is asset and vehicle finance. Having diversified the brokerage in 2004 off the back of his background in asset finance, the company has built a reputation as the go-to guys for car loans.

While dealing with their own extensive client base, Mildura also service the clients of six aggregators across the country and have over 5,000 brokers sending them business.

Now, the company is focused on educating and training brokers to write asset and vehicle finance themselves.

“That has been our focus – educating and training brokers and showing them how to go about it, how to find clients and how to write it,” Mr Schroeder says.

“What we tell our brokers is if they are at a barbeque and someone says they are buying a car, the broker can do it,” he says.
Mining your own client base is the best starting point.

Mildura Finance has found that the average client owns 1.5 cars, which are changed over every 31 months, so you have the opportunity to see your client every 2.5 years.

The average broker has 300 clients. That’s 450 cars which are going to be changed over in a three-year term – that’s the opportunity.

In addition, Mr Schroeder has noticed how new homeowners are likely to purchase a new car within 12 months of settlement.

“A person buys a new house, within 12 months they change their car,” he says. “That is very common.

“So if you have just done a home loan for your client, probability says that in the next 12 months they are going to change that car over – why wouldn’t you write the car for them as well?”

Debtor finance

On paper, debtor finance sounds like a nightmare. Just reading that subhead probably makes some brokers fearful.

But according to Mr Langham it’s easy as.

All a broker really has to do is give the referral to the provider and they do all the heavy lifting, Mr Langham says.

“There’s no accreditation; unlike something like equipment finance, where the financier relies on the information given to them by the broker, in debtor finance – because it is so specialised – the provider will do all the due diligence,” he says.

Typically, Mr Langham says, there’s an upfront payment ranging from $500 to thousands depending on the size of the deal and brokers may receive a trail depending on how much the client borrows.

“It’s all about finding the opportunity, flicking it onto the specialists and it’s all pretty easy,” he says.

Mr Langham points out most brokers don’t realise that if they have a client that takes on debtor finance their business should grow with the additional working capital that you have sourced for them.

“As that business grows they’ll buy more machinery, they’ll buy more trucks, they’ll buy a bigger house, or you might go and finance a boat.

“The broker that can build that sort of relationship is the one that can benefit the most,” he says.

Lending, whether it be residential or commercial, as any good broker will testify is more than just commission and trail.

You’re helping your client become more successful in life – and business.