Building long-term relationships in commercial broking

Many brokers still regard commercial lending as a sideshow: a way to assist existing clients with the odd deal, and make a buck. That was a great business model – but today’s top commercial broker looks for a long-term relationship with a client. In fact, a broker now has the tools and the lenders to help a business at almost every stage in its life cycle, and in this feature we explain how. 

There’s nothing new about brokers helping businesses expand, FAST CEO Brendan Wright explains. Brokers have been doing it for 30 years, and equipment finance is even older. However, he concedes that the landscape is “changing at one million miles an hour … brokers are doing more and more for the holistic commercial needs of business owners”.

As Wright puts it, “what’s played out in the residential mortgage space is playing out in the business lending space”. Brokers are doing several deals with the same client, adapting their services as the client’s business changes rather than offering one type of finance to multiple clients. They’re also offering residential mortgages to business owners and their employees, generating even more leads. 

Services such as debtor finance and asset and equipment leasing may seem unfamiliar to many brokers, but being able to off er them is part of the traditional broker proposition. “What a broker brings, whether it’s in the commercial or residential space, is consistency for the client,” Wright explains. 

While business bankers come and go, a broker can assist a business in achieving its long-term development goals.

Brokers need to stop thinking of these extra services as a cross-sell; they’re an integral part of being a trusted adviser to clients, for all things finance. When it comes to commercial finance, it’s fine for brokers to ‘give it a go’, and indeed lenders are pushing commercial finance harder than ever, but brokers can be far more ambitious. As Wright concludes, “there’s an opportunity for brokers to be a genuine first point of call for business owners who want to have a finance and debt expert to help them with their needs”.

NEVER WRITTEN A COMMERCIAL LOAN?
Even if you’ve never written a commercial loan, this article may still be useful to you. 

We asked FAST CEO Brendan Wright how a broker who’d never been involved in commercial lending should get started.

“Have a look at your existing customer base and see how many of them are self-employed and already own businesses,” he said. “If it’s only a small percentage – less than 5% – well maybe you don’t want to step into it, but if it’s any more than 10% of your client base, I’d encourage a broker to consider what their next steps are.”

This article is all about setting out those steps, with the first part devoted to start-up and self-employed borrowers who may already be in your client base. It also contains information on available training and resources, and brokers are advised to speak to their aggregators.

STARTING UP
You can’t avoid reading about start-ups, but you don’t have to be a millionaire venture capitalist to get involved. It’s taken a few years, but Australia now has its own Silicon Valley, the Stone & Chalk fintech start-up hub, which launched in Sydney in late 2015. In a sign of the times, even ASIC has created a dedicated division to make life easier for Australian start-ups. In short, Australian entrepreneurs are about to be unleashed, and brokers will play an important role. 

It might appear obvious, but small businesses need small finance. Beau Bertoli, CEO of Prospa, a small business lender that recently partnered with AFG, told Australian Broker magazine: “If you talk to a bank and you ask what a small business loan is, quite often they will tell you it is a $200,000 or $500,000 loan. Our average loan is $25,000.” Many banks and business bankers don’t have the structures – or the motivation – to provide such small loans, meaning brokers can become a critical resource for such borrowers. 

It’s not only glamorous tech start-ups that need a broker’s help; many of your clients may be self-employed individuals with ambitions to build a business around them. With lenders often requiring the borrower’s residential property as security, it’s important for a broker to consider borrowers’ residential mortgages. 

Finally, as Bluestone’s national manager, sales marketing and distribution, Rodyen D’Vaz, notes in his Q & A, new businesses may also struggle with cash flow, due to overly optimistic predictions of their initial income, and delayed payments (see ‘Cash fl ow support’, p52, for more information about debtor finance). It’s because of these cash flow issues that accountants can be a particularly valuable referral source for start-up business leads.  

It’s never too early for a broker to help a start-up business. With a variety of options available for securing the loan – whether against residential property or assets – the challenge is for the broker to understand their client’s business from top to bottom. 


Royden D’Vaz
National manager, sales, marketing and distribution
BLUESTONE

Fast fact
Australia was ranked the 11th best country in the world for starting a business, and the 13th for overall ease of doing business, by the World Bank Group’s Doing Business report for 2016.

Q&A: START-UP BUSINESSES
• Why would a start-up business go to a broker, rather than the bank?


This really comes back to the reason why brokers have become successful in the first instance! They have access to a range of products from a range of lenders and therefore are more likely to have a solution suited to the business owner and the particular scenario. From our experience, the ability to provide the best solution for a borrower is being able to fully understand the detail of the deal and then being able to match this to the product that suits whatever lender it is.

• What are the main challenges facing start-up businesses in 2016?
It can be challenging enough starting a small business and running it, without the worry of managing finances or sourcing additional working capital. The feedback we have received has highlighted cash flow as the biggest challenge. This is often because when starting a new business most are fairly optimistic about their expected performance, but it is always wise to budget for the worst-case scenario just in case, and if things don’t go your way initially, it would be a shame to close up shop on what will in most cases be successful given time.

• How can brokers reach start-up businesses? 
Referrals from accountants and solicitors are especially effective for generating leads in this area. If you can build and maintain even 23 good relationships you will be surprised by the number of leads that are generated. Every business new or old is part of a specific industry, and each of these has governing bodies, regular events and numerous publications in print and online. By simply brainstorming different customer segments one by one and investing a few minutes on Google you will find plenty of opportunities for sourcing business.

• Given the high degree of failure among new businesses, why should brokers care about this sector at all?
There may be failures, but there are also a lot of successes; new businesses are being started at a faster rate than ever before, and if you don’t cater for them your neighbour will! Don’t let them benefit from what is potentially a long-term loyal customer who will come back for more time and time again. You find a solution in their time of need and they will never forget it.

• What features of your products make them particularly suitable for start-up businesses?

At Bluestone we have built a suite of products for self-employed and small business customers. Using the equity in their home, clients with a business as young as three months (ABN registered) can access cash-out up to $200,000, which can be used for additional working capital.

ACQUIRING EQUIPMENT
Equipment and asset finance and leasing is one of the most useful areas of broking, for the simple reason that both residential and commercial customers purchase cars and are increasingly looking for more competitive finance than the banks are willing to off er direct. We focus here on the commercial side and the relatively easy opportunities it offers brokers.

Asset finance has always been on brokers’ agenda, but 2015 saw it grow markedly in importance in response to the government’s federal budget. Among the main promises in the budget was the promise of immediate tax deductibility on every asset worth under$20,000 purchased before 2017.

Equipment and asset finance plays an important role in the development of long-term broker-business relationships, according to Frank Crombie, director of aggregation services at NLG Leasing. 

“This advisory approach deepens relationships and supports the growing expectation that brokers provide a full-service offering. Clients are ring-fenced, and brokers benefit from increased revenue and a competitive advantage in a highly aggressive market.”

In a basic sense, the reason businesses may wish to fund rather than buy out-right is in order to conserve working capital, which helps protect their ROI. Businesses use asset finance in different ways as they develop, Crombie explains: “For newer businesses, asset finance can assist with set-up costs.  More established enterprises can use asset financing to support growth, with the most common motivation being to fund expansion either by purchasing additional equipment or upgrading outdated and less efficient goods.”

In practical terms, equipment fi nance has several advantages when it comes to maintaining relationships. Businesses may need funding for equipment several times a year, and as the turnaround times are relatively quick – from one to three days, according to Crombie – it provides an easy way for brokers to stay relevant to their clients.

Equipment and asset finance is an easy entry point for less experienced commercial brokers looking to provide this service, or for more experienced brokers to add to their service proposition. Lenders often offer spot-and-refer models in which a broker simply hands on the client, but they also off er support for brokers who want to do more of the work (and get more of the commission) themselves. 

Experienced brokers can integrate equipment finance and leasing into a business’s long-term strategy. Crombie notes that “equipment acquisition through a leasing structure is a smart alternative that allows the reallocation of funds to other areas of the business that can have a positive effect on efficiencies, productivity, sales, and ultimately growth”. 

NEW TRAINING PROGRAM FOR EQUIPMENT AND COMMERCIAL FINANCE
In late 2015 the MFAA launched a new training program dedicated to equipment and commercial finance, in conjunction with ANZ and FAST, which they claim will help brokers ‘future-proof’ their businesses.

The program has two modules: beginner-intermediate and advanced. The beginner-intermediate module is taught through four online courses, covering market, products and services, and business practices.

The advanced module has online modules and also includes a one-day workshop for peer-to-peer sharing of experience and advice. It focuses on 
financial analysis, business entities and practical case studies.

Furthermore, a third ‘masterclass’ event will be launched in 2016 and will enable brokers to learn from top performers in the commercial lending space. 

All courses include CPD hours (at least four per module) and the cost is $400 for the beginner and intermediate modules and $600 for the advanced module.


Frank Crombie
Director of aggregation services
NLG LEASING

Q&A: ASSET AND EQUIPMENT FINANCE
• How can a broker start a conversation with clients about asset finance?
We encourage brokers to simply ask private and commercial clients about their current assets and financial goals to determine if they’ll benefit from asset financing. If a broker is gathering information for the purposes of securing the customer a residential mortgage, then a significant amount of information has already been collected. Asking some additional questions pertaining to the objectives and requirements of the customer will uncover equipment finance opportunities.  

We recommend using social media and electronic direct marketing to increase customer awareness that the broker has an asset and equipment finance capability. This should help counteract the common perception of customers not realising that the broker could provide car loans, for example, as well as mortgages.

• What types of assets are Australian small businesses most commonly looking to finance?
The commercial market (in particular SMEs) continues to demonstrate strong demand for motor vehicles (including cars, light commercial, trucks and trailers), tractors, excavators and other earth-moving equipment. There is also solid demand for IT infrastructure and restaurant/hospitality goods. The commercial market is increasingly receptive to alternative financing solutions that enable the immediate use of the goods, while freeing up funds to be reallocated to other areas of the business that support efficiencies, productivity, sales and growth.  

• What are the key differences between asset fi nance and commercial property finance?
Asset finance and commercial property finance are completely different in their structure, processing and outcomes. Generally, asset finance is secured against the asset itself and requires no further cross-collateralisation. Many asset finance transactions can be completed under lenders’ low-doc policies, assuming the applicants meet the criteria for qualification, therefore providing a streamlined application process. This usually enables asset finance transactions to be completed quickly (often in one to three days).

By comparison, commercial property finance is larger in value, takes longer to materialise, and tends to consist of more complex structures and security options. This complexity naturally involves a more intensive transaction process, which correlates to longer turnarounds (weeks to months or years).

• How can you help brokers who’ve never dealt with asset finance before? 
Brokers are offered two engagement models:
1.    Spot and refer: Whereby the broker obtains permission from their customer to supply their name and phone number to NLG Leasing to process/manage directly. A ‘spot fee’ is paid to the broker for the referral, which is paid upon settlement. This model has traditionally been favoured by brokers who are hesitant to diversify into asset finance.
2.    Online lodgement: The NLG Connect platform is a customised, intuitive system that provides an easy-to-use overview of all wholesale rates and products and has an adjustable fee/commission function. The broker remains the customer point of contact and is supported throughout the process by a team of experienced specialists who provide the vetting, lodgement, document generation and settlement functions.

CASE STUDY: UTE MASTER
NLG Leasing was contacted by a broker who had a client seeking to purchase a new ute for his expanding landscaping business in Sydney’s inner west. He was looking to take on an apprentice (who would need access to a vehicle) and therefore wanted to purchase a new ute for himself, though he was struggling to prioritise between the two points of expenditure due to cash flow.  

The deal was approved and settled in three business days, with repayments structured over five years to reduce the impact on cash flow, allowing the hiring of the apprentice and further growth. The loan was approved under the lender’s low-doc policy based on the asset’s age; the client’s clear credit history and ownership of real estate; the loan amount (less than $55k), and the business being in operation for more than two years. 


BUYING BUSINESS PREMISES
DANIEL GREEN, GREEN FINANCE GROUP

Placing fifth on MPA’s Top 10 Commercial Brokers list for 2015, Daniel Green specialises in pub and hotel finance and has an in-depth understanding of the industry gained from first-hand experience. “It’s a dynamic industry with elements of tradition and transition … add in the intricacies around liquor licensing and gaming and it makes for an interesting workplace,” he says.

“I see my role as more of a business partner’s,” Green told MPA. “There’s more to the client relationships than the initial finance approval, and I’m legitimately invested in the success of my clients’ business long-term.” As part of this long-term approach, he offers:

•     regular reviews
•     monitoring of adherence to banking covenants
•     reviewing of interest coverage
•     debt servicing and profitability
•     management strategies

This approach is working well, he notes, with eight out of 10 deals referred by existing clients. 

Helping businesses acquire commercial property is commonly seen as a gateway for residential brokers expanding into commercial. The security is still property; the goal is still finance. However, unlike the family home, the purchase of commercial property is not an end in itself but just part of a business’s long-term strategy, which you, the broker, should understand.

Peter Vala, head of sales and distribution at specialist commercial lender Thinktank, has identified four basic reasons why a business would want to acquire its own premises. The first is the simplest: to have control over their premises, especially if they’d like to make targeted improvements as part of a long-term development strategy. For businesses that rely on their local presence, having complete control over their property may be of added importance, Vala notes, as having to relocate at the end of a third-party lease could be detrimental to their brand. 

Businesses may also be “pursuing a broader personal and business investment strategy”, Vala explains, “which includes the acquisition of the property in their self-managed super fund”. Another reason – also shared by homebuyers – is to take advantage of the low interest rate environment and spend money on repayments rather than rapidly rising rent payments. 

Once a business has made the decision to acquire a property, its initial concerns may “not be greatly dissimilar to a residential investment or owner-occupier property buyer”, Vala explains, with typical questions including ‘Will the loan be approved? Will the independent valuation come in at the purchase price? What happens if the loan repayments become too much?’

There are some more specific issues that may need to be addressed: GST payable on purchase; zoning; ability to improve the property; impact on neighbouring businesses; the prospects for the local area; and any covenants or existing leases affecting the property. “This is where good advice comes into play from the client’s solicitor and other professional advisers,” Vala observes. The broker can help with issues surrounding financial structure.

As with residential properties, it’s vital to maintain good relationships with BDMs and relationship managers. Given the extended timeframe for many commercial property transactions, all parties need to be kept updated about the loan process. Having a real understanding of the security property and how this relates to the client’s business and industry is particularly important.

EXPANDING TO NEW MARKETS
In a way, all the types of finance discussed in this feature relate to expansion, because expansion can take many forms, almost all of which are relevant to brokers. In the most obvious sense, expansion could be geographical, ING Direct’s national partnership manager commercial, John Kolyvas, explains. 

“Some look to increase market share in their existing geographical patch by expanding their sales team,” he says. “Others might look to expand into other states, establishing interstate offices and often keeping production out of the existing location.”

Moving into new premises or acquiring premises for additional offices requires commercial property finance, but it might also necessitate new equipment, which the broker can help fund. Furthermore, new staff  could themselves be potential customers for your residential business.

“A business may also be looking to expand through new distribution channels,” Kolyvas adds. “For example, moving from retail to wholesale or vice versa, or potentially moving online.” Again, equipment finance may come into play, as might debtor finance. Kolyvas also notes that buying out competitors or – “if a business has a great model but limited capital for expansion” – franchising could be another route to expansion. 

Given the complexity of any expansion strategy, it’s vital that a broker works closely with both lenders and all of a client’s advisers, accountants, solicitors et al. With limited differentiation in the pricing of business term loans, the willingness of a lender to understand a client’s business – and your ability to facilitate that understanding – becomes of paramount importance.


John Kolyvas
National partnership manager commercial
ING DIRECT

Q&A: EXPANSION FINANCE

What types of funding might an expanding business require?
The most common funding for an expanding business is a business term loan, often secured by residential property. If the expansion plans require new premises, they will often look at commercial property loans as an option to own their building, and for growing equipment needs there is asset finance. Cash fl ow/debtor finance is another option if a business is experiencing rapid growth – effectively the funding can grow with the business. There are lots of different funding options for different expansion plans, but most businesses, however, use a combination of the different types of funding available. 

• How involved should a broker be in guiding a business’s expansion?
It’s about knowing your strengths and knowing your client and their business. Ideally you should consult with your client and their accountant to establish a funding solution that is suitable and meets the client’s business objectives. An accountant’s input is invaluable when looking at cash fl ow projections and establishing future funding needs, so it pays for a broker to establish these relationships through or alongside their clients. There is also an onus on the client to engage their broker as early as possible. Transparency about current and future funding needs and forward planning can make a significant difference to all parties.

• How can you help brokers and businesses through this process?
Unlike residential property loans, there tends to be little differentiation between commercial loans, so while of course we’re competitively priced, we see our real value-add as our people. We have an experienced team of commercial bankers to assist you with structuring commercial loans for your clients and guide you and your clients through the process.  

Our state commercial managers have a wealth of experience and can tailor our service to your needs, whether you are primarily a residential broker who may need a higher level of support and guidance through the commercial landscape, or whether you are a more experienced commercial broker with more complex transactions.

We also have a credit assist team dedicated to helping our residential brokers every step of the way when looking at a commercial transaction.


Peter Langham
CEO
SCOTTISH PACIFIC






Greg Charlwood
General manager
FACTORONE






Q&A: DEBTOR FINANCE
• At what stage in a business’s life cycle might it require debtor finance? 
Peter Langham, CEO of Scottish Pacific: Debtor finance can assist at all stages. It’s a very dynamic and versatile form of business finance, and is particularly helpful in growth stages. The beauty is it’s not tied to the value of personal assets such as the family home. The amount of funding available is linked directly to the sales of the business, so as the business grows the size of the facility grows with it. It is also invaluable for succession planning, such as when a retiring owner wants to pass the business to a family member and extract maximum value from the business while ensuring it has sustainable funds.

Greg Charlwood, FactorONE spokesman:  At FactorONE many of the businesses we fund are just starting out, or have cash flow pressures that might prevent the banks from financing them. At this end of the market, brokers can look out for clients who are start-ups or who have orders that are outstripping cash flow. It can also be used to inject cash if a business needs to buy some time to resolve a cash fl ow issue that might be the result of suffering a bad debt, loss of a big customer or a suspension of production.

• Are struggling businesses the only clients who require debtor finance?
Peter Langham:  Absolutely not. Historically this was a common misconception, but the commercial finance industry has moved on from that notion. At Scottish Pacific we work regularly with brokers, bankers and accountants who refer their clients because they see the benefits of debtor finance in a whole range of situations – but particularly when they are involved with a business that is growing more quickly than its asset base would otherwise allow. Most of our clients are long-term. Some clients have been with us for decades, and continue to grow.

• How can a broker identify clients in their database who may have cash flow problems? 
Greg Charlwood: Many SMEs and start-ups don’t look beyond an overdraft or family loans to fund their business, because they don’t know what else is available … Brokers can start a conversation with clients, about how to meet increasing wage bills, whether they have ATO obligations to meet, constant creditor issues or slow payers, or if their overdraft limit is often being breached.

• How much understanding of a business does a broker need to off er debtor finance? 
Peter Langham:  Debtor finance is an easy new revenue stream for brokers to introduce into their business … Scottish Pacific works closely to support our referring brokers and provide information and marketing materials. 

Greg Charlwood: Once a broker introduces FactorONE to their client, we can take care of the detail, and we are happy for the broker to be as involved in the process as they want to be.

CASE STUDY: FIRM FOUNDATIONS
Factoring – where debtor finance is combined with accounting assistance – can enable business growth, as in the case of Queensland construction supplier Concrete Options.

Concrete Options services construction projects, and everything is done on account. This creates cash flow issues if customers take their time to pay, or if there are seasonal issues such as a few weeks of rain bringing construction to a halt. The Sunshine Coast was the base for Concrete Options for many years; however, in recent years they expanded into Mackay in Central Queensland.

With Mackay experiencing local economic troubles in 2014 and constant rain, the company struggled to pay for new steel. Using FactorONE to pay suppliers, rather than waiting for slow payers, allowed the owner to both focus on new customers and expand into another business entirely. 

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