Small commercial lending - The opportunity

As more and more small business owners seek to own their own premises, the market for commercial lending is growing. However, the volume of brokers able to service these clients isn’t keeping pace.

Many brokers remain apprehensive about the area due to the complexity and lack of flexibility in the loans, so those who do venture into the (relatively) unknown can reap significant benefits.

Commercial clients often come from the burgeoning self-employed sector whose members are transferring the great Australian home ownership dream to the workplace.

“There are a lot of self-employed people wanting to buy their own premises instead of renting as it stabilises their cost base,” says John Swanson, chief executive officer of All Finance.

With already 2.1 million small businesses across the country (according to the Australian Bureau of Statistics), brokers who can cater to SME clients have become more valuable than ever before. Diversifying into this sector should therefore be a natural progression for any broker with their eye on their revenue streams.

“If you’re not writing commercial loans then you’re going to find your business will start to fade,” he says.

Also, as the sector is not well serviced, more and more brokers are referring clients on to fellow brokers who work in this space. “They’re tearing up money and I don’t think they know what the implications of doing that are,” says Mr Swanson.

“It’s not just brokers who won’t touch the sector; I’m receiving referrals from branch managers who don’t know how to read balance sheets and profit and loss statements,” he adds.

“Because of our skill set we do have an advantage and that’s why we generate so many referrals.”

Furthermore, the need for brokers in the area has never been so pronounced as banks continue to shun commercial borrowers.

Liquidity Finance’s Danny Luu says most clients who approach him for a commercial loan have already been knocked back by a bank.

“This is an area that’s been neglected by the banks and it needs brokers who can capture the quality stuff that the banks are knocking back,” he says. “I think it’s a big, big market for us and once we get a few tricky ones done, then word will spread quickly – so the growth potential is huge.”

Finally, demand for commercial properties is also on the rise, according to Raine & Horne Commercial, which states that commercial sales are expected to “continue along in 2012”.

GETTING IN ON IT
The commercial lending sector may currently comprise just a small group of qualified brokers, but it’s not hard to gain entry to the club.

For example, brokers are finding ING DIRECT’S commercial products a gentle way to go about entering the market since the group has aligned much of its commercial documentation with its residential offering.

“If you can do a home loan, you can write ING DIRECT’s commercial paper providing you know what a balance sheet and a profit and loss statement is,” says John Swanson.

Managing director at GoldKey Financial, Mark Golding, adds that “it’s a straightforward and easy lending process once you understand the intricacies”.

Getting into the sector doesn’t mean having to generate leads out of thin air; in fact, most brokers will already have a reasonable number of SME owners on their existing database.

While expected revenue might be similar to that of residential loans, commercial loans are on a much larger scale.

Choice Aggregation Services’ national commercial and sales manager, Dennis D’Angelo, says “the deal sizes are two to three times bigger so brokers’ remuneration is typically much higher per deal”.

Mr Golding adds that brokers only need a small percentage of the market to do well out of it: “In the range of the $1 to $3 million mark there is a significant amount of business,” he says. “Lots of businesses need our help to navigate the minefields of banking guidelines.”

Depending on how complex the transaction, you may also be able to justify a fee for service. If a loan is worth $2 to $4 million and there’s a lot of background work, for example, then it’s quite justifiable.

Mr Luu believes chasing the big deals can lead to big rewards. “The bigger the risk, the bigger the return,” he says. “All it takes is one big commercial loan and you can meet your entire target for the year.”

But while these deals are enticing, this end of the market can be difficult, cautions Mr Golding.

“Anything around $10 to $15 million is a part of the market that some may attempt to crack, but you can spend a lot of time and money here on a loan that may not make it through to settlement.”

The opportunity

Residential mortgage lending remains the backbone of any broker’s offering, but there are also plenty of opportunities in the commercial lending space

It’s a case of a very big pond with very few fish.

As more and more small business owners seek to own their own premises, the market for commercial lending is growing. However, the volume of brokers able to service these clients isn’t keeping pace.

Many brokers remain apprehensive about the area due to the complexity and lack of flexibility in the loans, so those who do venture into the (relatively) unknown can reap significant benefits.

Commercial clients often come from the burgeoning self-employed sector whose members are transferring the great Australian home ownership dream to the workplace.

“There are a lot of self-employed people wanting to buy their own premises instead of renting as it stabilises their cost base,” says John Swanson, chief executive officer of All Finance.

With already 2.1 million small businesses across the country (according to the Australian Bureau of Statistics), brokers who can cater to SME clients have become more valuable than ever before. Diversifying into this sector should therefore be a natural progression for any broker with their eye on their revenue streams.

“If you’re not writing commercial loans then you’re going to find your business will start to fade,” he says.

Also, as the sector is not well serviced, more and more brokers are referring clients on to fellow brokers who work in this space. “They’re tearing up money and I don’t think they know what the implications of doing that are,” says Mr Swanson.

“It’s not just brokers who won’t touch the sector; I’m receiving referrals from branch managers who don’t know how to read balance sheets and profit and loss statements,” he adds.

“Because of our skill set we do have an advantage and that’s why we generate so many referrals.”

Furthermore, the need for brokers in the area has never been so pronounced as banks continue to shun commercial borrowers.

Liquidity Finance’s Danny Luu says most clients who approach him for a commercial loan have already been knocked back by a bank.

“This is an area that’s been neglected by the banks and it needs brokers who can capture the quality stuff that the banks are knocking back,” he says. “I think it’s a big, big market for us and once we get a few tricky ones done, then word will spread quickly – so the growth potential is huge.”

Finally, demand for commercial properties is also on the rise, according to Raine & Horne Commercial, which states that commercial sales are expected to “continue along in 2012”.

Getting in on it

The commercial lending sector may currently comprise just a small group of qualified brokers, but it’s not hard to gain entry to the club.

For example, brokers are finding ING DIRECT’S commercial products a gentle way to go about entering the market since the group has aligned much of its commercial documentation with its residential offering.

“If you can do a home loan, you can write ING DIRECT’s commercial paper providing you know what a balance sheet and a profit and loss statement is,” says John Swanson.

Managing director at GoldKey Financial, Mark Golding, adds that “it’s a straightforward and easy lending process once you understand the intricacies”.

Getting into the sector doesn’t mean having to generate leads out of thin air; in fact, most brokers will already have a reasonable number of SME owners on their existing database.

While expected revenue might be similar to that of residential loans, commercial loans are on a much larger scale.

Choice Aggregation Services’ national commercial and sales manager, Dennis D’Angelo, says “the deal sizes are two to three times bigger so brokers’ remuneration is typically much higher per deal”.

Mr Golding adds that brokers only need a small percentage of the market to do well out of it: “In the range of the $1 to $3 million mark there is a significant amount of business,” he says. “Lots of businesses need our help to navigate the minefields of banking guidelines.”

Depending on how complex the transaction, you may also be able to justify a fee for service. If a loan is worth $2 to $4 million and there’s a lot of background work, for example, then it’s quite justifiable.

Mr Luu believes chasing the big deals can lead to big rewards. “The bigger the risk, the bigger the return,” he says. “All it takes is one big commercial loan and you can meet your entire target for the year.”

But while these deals are enticing, this end of the market can be difficult, cautions Mr Golding.

“Anything around $10 to $15 million is a part of the market that some may attempt to crack, but you can spend a lot of time and money here on a loan that may not make it through to settlement.”