Broking in the era of diversification is supposed to mean an ability to lend for all of a customer’s needs, whether they be residential, commercial, vehicle finance, aged care or any other.
Indeed the typical application process for an unsecured loan is a deterrent in itself, recalls Beau Bertoli, joint CEO of Prospa. “The traditional banking system really hasn’t provided solutions that work for small business owners… the application process was pretty atrocious and still is to this day.” After multiple forms and years of business history – often involving a trip to the accountant – and two to four weeks waiting, an approval was far from guaranteed. If it did arrive, the conditions could be offputting. “If the answer was yes, they’d want the family home as security. We’re talking about a $30,000–$40,000 business loan, which is absurd.”
For most brokers in 2016, however, that’s still an unattainable goal. Unsecured lending remains a void that lenders and brokers have seemed unable or even unwilling to fill until now.
Bertoli’s company, Prospa, is one of the emerging stars of Australia’s fintech boom; it was a finalist in Telstra’s Business Awards and winner of Deloitte’s Fast 50 award. Prospa uses technology to radically speed up unsecured lending – down to 24 hours to funds being recieved – and use digital sources of information to do the entire process online.
But while the technology is impressive, that’s not actually what this article is about; it’s about how a quick turnaround can make unsecured lending a viable income stream for your brokerage.
Andrew Browne is director of TAG Financial Group, based in Como, WA, and has been dealing with small business owners for years. Given TAG was and still is a ‘solutions-based company’, unsecured lending “was always a bit of a void for us ... quite often it wouldn’t suit the mainstream lenders, or the loan size wasn’t efficient enough to whet their appetite and quite often the client didn’t have adequate security”.
Moving into new areas of lending can be burden on a brokerage’s infrastructure, says Browne, but this was negated as the lender (Prospa) was providing the marketing collateral and IT support. Technology greatly aided set-up; in Browne’s case Prospa provided a link that actually embedded an online application form into TAG’s website. This had huge commercial advantages, Browne recalls. “Within 48 hours we had an iframe built into our website, which meant our clients could make applications and we were getting responses back within 48 hours.”
In essence, all small businesses may have a need for quick, unsecured capital. Browne has a typical example: “We had a client early on who set up their restaurant and possibly 14 months after they opened their doors, unbeknown to me, the business was going so well that they decided to take over the lease next door and expand into that space. I believe it happened fairly quickly and they looked at the opportunity to grow without thinking ‘how are we going to fund it?’ ” The loan was small – only $50,000 – but enabled them to quickly get back in business after the expansion.
According to Prospa boss Bertoli, there are numerous other ways businesses use this capital: as working capital during lulls, to take advantage of short-term stock discounts; for marketing campaigns and hiring and training staff. Key industries include retail, hospitality, building and trade and professional services, healthcare, gyms and fitness. However, capital is always in demand, insists Bertoli. “A really good exercise I do is to ask a business owner, ‘If I gave you $25,000 right now, could you find a good use for it in your business?’ And the overwhelming answer is yes, of course they can.”
With typically small loan amounts, it’s important to ask yourself whether unsecured business lending is worth your while. The commission splits can be relatively generous: Prospa pays 1–4%, depending on the features of the loan and the strength of relationship, which shouldn’t be underestimated given they lend up to $250,000, although the average loan size is much lower, at $25,000.
“Ask a business owner, ‘If I gave you $25,000 right now, could you find a good use for it in your business?’ And the overwhelming answer is yes, of course they can” Beau Bertoli, Prospa
Realistically, for most brokers unsecured lending must be treated as an additional revenue stream, albeit one, Browne points out, that you currently don’t have. Unsecured lending is also an additional service for your existing customers. This is making a difference to TAG’s finances, says Browne: “It really supplements it, and it’s a tough market here in WA at the moment, so it’s really helpful.”
Furthermore, this is an ongoing revenue stream. The above-mentioned restaurant client of Browne’s has since returned for another loan, as do 70% of TAG’s settled unsecured lending clients. That need for capital is not going to go away, as Prospa’s Bertoli points out. “If you ask small business owners what the biggest obstacle is to growing their business, they’ll near universally say access to capital.”
For Browne, it’s an example of technology making an immediate and concrete contribution to his business. “I just think with the fintech guys, who are using technology to provide a solution for clients, partnering with brokers is certainly a thing of the future.”