According to a recent research paper by the Productivity Commission on small business access to finance, new business asset finance in 2019-20 (to SMEs and larger firms combined) totalled $45.6 billion (mostly comprised of chattel mortgages or equipment loans).

But this has not been just another normal year.

Despite the coronavirus pandemic having had devastating impacts on many Australian businesses in the last 18 months, the reopening of the two largest states (NSW and Victoria) has many businesses preparing to kit out their businesses and service the summer rush.

The trend towards asset finance has already started. The Commonwealth Bank of Australia (CBA) revealed that asset finance lending grew 20 per cent year-on-year during the 2021 financial year, representing the biggest-ever volume of new asset finance lending recorded by CBA in a financial year.

The largest new lending growth was in aircraft and shipping (up 150 per cent), earthmoving equipment (up 120 per cent), agriculture (up 50 per cent), motor vehicles and light commercial vehicles (up 40 per cent), and trucks and trailers (up 35 per cent). Businesses have capitalised on customer demand in 2020 and government tax incentives (such as the government’s instant asset write-off) to invest in equipment upgrades, expansion of fleets, new fit-outs, and technological advancements.

Indeed, ANZ data showed that during the Coronavirus SME Guarantee Scheme Phase 2 (which ended on 30 June 2021), the major bank processed 18 per cent more asset finance transactions for its customers than the previous year.

As such, now is the time for brokers to be positioning themselves as an SME client’s trusted adviser for guidance on asset finance.

But asset finance is not just limited to finance brokers and specialist asset finance brokers, mortgage brokers are increasingly turning to asset finance too off the back of rising inquiries from SME clients.

According to Pepper Money head of commercial Malcolm Withers, clients do not view their brokers as just a home loan broker but as a finance professional who can assist them with all of their finance needs.

During a session at The Adviser’s New Broker Academy 2021, Mr Withers said: “Your customer might be trying to satisfy a need for their asset finance, commercial loans, or their cash flow finance so being across a wide range of products gives you a great ability to help them… and satisfy more of their needs.”

In addition, Pepper Money general manager asset finance Ken Spellacy said the potential income and upfront commission outcomes are higher in asset finance compared to residential mortgages, providing an attractive proposition to mortgage brokers looking to diversify.

He said: “Brokers are always on the lookout for chances to add to their proposition, but many are leaving the opportunity to broaden and deepen their customer relationships, the value they can provide to customers – and ultimately the income they can generate – on the table by ignoring the potential that lies within providing asset financing services.”

According to Mr Spellacy, there has been demand for new and used motor vehicle finance, yellow goods, green goods, material handling and trailers, and caravans in the past year, as well as funding for “secondary assets, including prime movers, medical equipment, commercial plant and equipment or tertiary assets including computer systems, photocopiers, solar and renewable energy assets, and business fit outs.”

With COVID-19-related lockdown restrictions lifting (and poised to ease further in the coming months) the demand for asset finance could rise higher as businesses reopen and ramp up investment, particularly in the hospitality sector (which has been battered by restrictions).

Why asset finance?

Asset finance is useful for SMEs that require debt to purchase or lease a new physical asset, and they may use the asset being funded as security. When compared to other forms of finance, the benefits include avoiding depreciation, removing unexpected costs and reducing upfront costs, freeing up capital, improving cash flow, and opening an additional line of credit.

Businesses could opt for other types of asset finance (such as a commercial hire purchase or an operating or finance lease) based on the asset’s life span, features, and use, in addition to the different accounting treatments and tax benefits available for each type of finance.

Quelling the nerves

If a mortgage broker decides to capitalise on this demand and offer asset finance, their first question could be: “how do I do this?”

While it may seem like a daunting endeavour, Nodifi chief product officer, Chris Sims noted that brokers are not required to have pre-existing knowledge (although it would be advantageous).

“You might not necessarily know too much about the asset or asset finance or anything like that but ultimately the set of questions that you ask at the beginning are always pretty much the same as a consumer loan,” Mr Sims told the New Broker Academy.

“[Ask] what are they looking to buy? How much money do they earn? Do they have a job? It doesn’t matter if it’s a car or a coffee machine or an excavator. It’s usually very similar questions. We can help educate that broker so they know what the real basic questions are so they can have that confident conversation at the beginning.”

Hitting the books

Similarly, Matt Atkin, president of the Commercial and Asset Finance Brokers Association and Atlas Broker managing director, said the first step would be to understand the client. While all brokers are required to do this, the needs of an SME client could be more complex compared to a home loan client.

He told The Adviser: “They’re typically looking for someone who they can talk to regularly throughout the year, whereas a mortgage broker might speak to the client once a year.”

As such, he recommends that brokers educate themselves to become well versed in reading a business’ financials, profit and loss statements, and balance sheets; particularly if they’re looking at providing a range of business finance solutions.

“If you’re going to succeed as an asset or equipment finance broker you have to know how to read and interpret balance sheets and profit and loss statements. I see lots of people who can read the numbers but can’t necessarily understand how to interpret it and help the client get financed,” he said.

Things to consider before diversifying

Before taking the plunge into asset finance, mortgage brokers are advised to do their due diligence and ensure that it meets their business objectives and lifestyle goals.

According to Mr Atkin, diversification (and providing multiple solutions to the one client base) could be better suited to brokerages that are growing and are planning continued growth. For those who decide to hire talent with the appropriate asset finance skill set, instead of writing the loans themselves, education is still paramount, Mr Atkin says.

“[T]hey’re the ones running that side of the business and servicing clients [but] you still need to do the training as the business owner,” he said.

“So, you still need to have the education and the broad view of asset finance so that you know what you’re doing from a technical standpoint, as well as from a compliance and risk management point of view.”

Mr Withers suggested that brokers could liaise with other professionals that their SME clients might be using, which could lead to referral partnerships and a larger client base.

He said: “I suppose the 101 for any broker when starting a business banking relationship portfolio is connect with the professional around the customer (their accountant and solicitor) and let them know that you offer these services as well.

“You’ll soon come to harvest the fruit of your labour by doing so.”

Tips for smashing asset finance

"Having a good mentor and finding someone who’s done it before is really important. The commercial and equipment finance sector is really collegiate so finding a mentor is probably not as hard as some people might feel it is. Before hanging that shingle outside and saying that you’re diversified, make sure you understand the sector by talking to people who have the knowledge."

- Matt Atkin, president, Commercial and Asset Finance Brokers Association, managing director, Atlas Broker

"For new brokers to ensure they can maximise their revenue stream, I would say make sure that you take every opportunity for what it is and don’t be afraid of those opportunities. So, if a customer comes to you and asks you for something, even if you’re not quite confident with it, take down the basic details. Then start to reach out to your network… and ask them the questions."

- Chris Sims, chief product officer, Nodifi

"While mortgage brokers deal with a PAYG (payslip), an SME’s cash flow and expenses change constantly and quickly. So, there are different variables to consider, including the asset’s life cycle."

- Ken Spellacy, general manager asset finance, Pepper Money

 "Tell all your customers that you offer a full suite of products, whether it [is]… asset finance or cash flow because to them, their business is the most important thing. That’s where they derive their income to pay for their home loan. The power of the “did you know” is immense, [whether it’s] on social media, in your marketing, or in your database.”

- Malcolm Withers, head of commercial, Pepper Money