With the bigger lenders seemingly stepping back from both business lending and niches like SMSF, this paves the way for alternatives to provide an offering. While brokers are well placed to help their SME borrowers with SMSF loans, they may need to work with other finance experts
While thinking about an SMSF loan typically brings to mind investement properties, small business owners are also relying on this type of lending to acquire their business premises. By using an SMSF loan, a business owner can pay rent to themselves while saving for retirement and then enjoy the benefit of zero taxation once they retire and move into the pension phase.
However, over the past year there have been a number of new developments in both SME and SMSF lending as banks have pulled back on their commitments in these spaces. Small businesses looking to use SMSF loans have been most heavily affected, which has inhibited their chances of obtaining effective financing.
This change represents a significant opportunity for brokers to advocate on behalf of borrowers. The great thing about this type of lending, says Thinktank head of research Per Amundsen, is that it has the potential to suit a very large number of borrowers.
Though the banks have pulled back, Thinktank has seen its own volume of SMSF loans match the growth of its wider business. On a monthly basis Thinktank sees up to 30% of its business represented by SMSF lending.
Amundsen says brokers may find that many of the customers they are already dealing with might be considering these types of arrangements. But there are misconceptions that need to be addressed and overcome, he adds.
“Paying rent to yourself has obvious benefits, and the security of tenure that you will enjoy can be very important” Per Amundsen, head of research, Thinktank
Ahead of the federal election, the Opposition argued for banning borrowing under limited recourse borrowing arrangements (LRBAs).
Amundsen notes that it wasn’t just borrowers who were concerned about the potential for change in this area either; the impression has been that banks have pulled back somewhat in commercial in the same way as they have in residential.
But with the Liberal Party retaining government at the last election, borrowers and lenders alike are beginning to realise that this hasn’t actually happened. Their interest has been piqued, and accordingly Thinktank has found that applications and settlements are rising.
“This may not be intentional, but it certainly seems to have been the case,” says Amundsen. “In SMSF lending a number of lenders withdrew altogether in anticipation of a federal election outcome that might have seen the end of LRBAs.”
Discussing the benefits of helping business-owner borrowers with SMSF loans, Amundsen points to tax considerations as the obvious advantage for the customer. But, more importantly, he highlights that the security which comes with the borrower being able to own their own business premises is a major selling point of this type of loan.
“Because purchases and rents need to be at market prices, there won’t be a great difference in the cash flow impact to the business itself, but paying rent to yourself has obvious benefits, and the security of tenure that you will enjoy can be very important,” he says.
One of the issues most often raised when it comes to SMSF lending is asset concentration, which is often present when SMSFs invest in real estate. This is no more significant for business owners, except that the level of investment held directly in the business is magnified. However, this is no different to the business premises being owned outside of superannuation savings, and asset allocation needs to be considered.
Brokers who want to offer SMSF loans to their business customers need to be separately accredited for SMSF lending. To help brokers entering the space, Thinktank frequently runs workshops with broker groups and associations.
“Brokers can acquire a lot of information over a period of time, and as with most things they will become increasingly experienced” Per Amundsen, head of research, Thinktank
“We will spend time with them in reviewing the various regulatory requirements as well as our own policies so they can successfully complete a questionnaire on the subject,” Amundsen says.
Once the broker is accredited, they will have a direct link to one of Thinktank’s representatives who have been extensively trained in SMSF lending. The lender also has in-house specialists who can provide guidance on specific points as necessary.
Brokers looking to reach out to these kinds of customers should talk to accountants and financial planners, says Amundsen. Frequently, these professionals are where borrowers go for the initial advice they need for retirement planning or to look after their superannuation savings.
“Getting expert advice all of the way along the process is really important,” he adds.
While a broker is in a fantastic position to help their SMSF borrowers, Amundsen reiterates the importance of teaming up with other finance professionals who can provide upfront information, because there is “a lot to know”. Thinktank itself might not provide advice directly to borrowers, but its representatives can suggest the types of questions they need to ask their advisers.
“Brokers can acquire a lot of information over a period of time, and as with most things they will become increasingly experienced with time,” says Amundsen.
“Borrowers need that expert advice upfront before they embark on this sort of investment, and making sure they have the support of good financial, accounting and legal advisers is in most cases the biggest first step, though it remains important throughout the life of the SMSF.”