Did you know nearly 2 million Australians are self-employed? Here's how to find, engage and write loans for the self-employed.
As a time-poor residential broker, you don’t necessarily have the time to chase new commercial clients. That’s where self-employed borrowers come in; they’re a bridge between your existing home loan clients and commercial finance, and may be in need of both these services.
Self-employed clients can make the process of diversification a lot quicker; you’ll be less likely to need specialist marketing as you’ll be starting with your residential database. Self-employed borrowers do, however, require a great deal of care and attention; with a mix of residential and commercial debts, an absence of paperwork and complicated tax arrangements, self-employed deals are rarely vanilla deals.
To equip you to make the move, this guide features expert guidance from the commercial teams at Suncorp, ANZ Bank, Liberty Financial and Bluestone Mortgages, covering borrowers with clear and more complex credit histories. Bear in mind that this article mainly concerns borrowers without PAYG documentation who may also have an existing residential debt relation-ship with the broker. For self-employed clients who wish to acquire property, gain unsecured expansion finance or restructure their cash flow, we’d advise you to read the other articles in this supplement.
Finding self-employed clients
If you have a database of residential clients or leads, and know their professions, you can start to pick out potential self-employed borrowers based upon their industry. According to Cory Bannister, vice president and chief lending officer at La Trobe Financial, “the self-employed borrower was once typically a blue-collar worker, likely to be your local plumber, electrician, builder, etc”. These professions still play a very important role – as Suncorp explains, the two most common industries for self-employed people are construction and health-related services. At Liberty Financial they also see a large number of tradespeople, freelancers and contractors.
However, there’s also a new generation of self-employed borrowers emerging who could be equally important for brokers. “Most recently, we have seen a rise in the online entrepreneur space as part of the current innovation push,” explains Bannister. “Whether it is an online retailer or an online service provider, this area has moved so fast we are finding other lenders caught off guard in how to deal with the changing self-employed landscape.”
This new generation doesn’t just work in retail – at Liberty Financial they also deal with those in the creative industries, such as artists and musicians. These clients are only going to become more important; innovation is being championed by the Australian Government, and this support doesn’t just extend to glossy TV adverts; 2015’s Federal Budget included $5bn in tax relief for small businesses, and since then Malcolm Turnbull’s accession to prime minister has only intensified government support for innovative businesses.
You’ll also find self-employed borrowers in the high net worth space, including doctors and healthcare professionals, lawyers, accountants and other financial service operators. They’re a growing sector: La Trobe has seen an increase in these clients as financial professionals increasingly leave corporations to act in self-employed consultancy roles.
Healthcare professionals are a crucial group, because several of the banks offer them particularly generous LVRs and serviceability terms. As a group they’re also relatively wealthy and extremely short on time, so have a natural need for a broker. Indeed, broker Louis Kovanis of Genius Loan Solutions used his specialism in high net worth healthcare professionals to climb to a Top 10 position in MPA’s 2015 and 2016 Top 100 Brokers lists.
Engaging with self-employed clients
If, like Kovanis, you’ve identified a likely client sector, you’ll need to engage with those potential clients. Don’t rush into a marketing strategy, advises Robynne Frost, Suncorp Bank national manager for small business and commercial. “The first thing before you implement any new marketing strategy is to make sure you understand what is important to that market.” This means researching what self-employed clients want, and using your existing clients as test cases, Frost explains. “Start asking more questions and completing needs assessments with your customers to assess small business lending opportunities.”
What Suncorp has found is that self-employed clients “are typically time-poor, digital savvy, and committed to saving money”. It wasn’t the only lender to emphasise that self-employed clients are short on time; Cosi De Angelis, general manager of commercial origination at ANZ, warns brokers to “be flexible as these people are running businesses during the day and generally don’t have time. Embracing technology will certainly assist in this regard but so will building a good referral network from people that support small businesses, like accountants and solicitors as well as local chambers of commerce, etc”.
La Trobe, Liberty and Bluestone insist that referral partnerships with accountants and financial planners are crucial, but they also have a number of other suggestions. John Mohnacheff, national sales manager at Liberty, notes that “local sports and community clubs and local business networks are also good ways to secure qualified leads”. Additionally, Bluestone’s national manager of sales, marketing and distribution Royden D’Vaz previously told MPA that “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”. D’Vaz suggests brokers research these areas and target their marketing spend accordingly.
Marketing now means more than just advertising, of course. La Trobe vice president Bannister suggests that by partnering with accountants and other professional services “brokers can target local small businesses by running seminars which may include topics such as purchasing your business premises through your SMSF; consolidating business debt through refinancing; and managing ATO obligations and business expansion strategies”. He also emphasises the importance of social media as an increasingly powerful referral source.
As in residential lending, an initial burst of effort on the marketing front can reward the broker with valuable repeat clients. Geoff Rees set up his brokerage Mortgage Watch in 1993 and now has the grandchildren of his original clients coming to him for finance. Talking to MPA for a recent article on the self-employed market (MPA 16.3), Rees emphasised that his clients saw him as a the convenient go-to option. “They know I can put everything in writing and give them the main options anyway, and we can often give them a better deal because we’re privy to some of the other specials, and a layperson is going to have a hard time researching all this,” Rees said.
Writing loans for
Once you have the client, you’re finally at the stage when you can start writing loans. Self-employed clients could be looking for commercial property finance, residential finance, equipment and asset finance for new tools (particularly trade vehicles) or, as in our case study (see boxout, p22), refinancing to address other debts. With so many different demands there are a correspondingly high number of products; we’ve asked lenders to describe these in the product guide at the end of this article.
The most obvious challenge when dealing with self-employed borrowers is the lack of a payslip. Lenders have different ways of addressing this. At ANZ, applicants will require a business plan, a cash flow forecast, financial statements and a personal statement of the positions of their directors, explains De Angelis, in order to build a picture of the client. “ANZ, with the assistance of a broker, will conduct an A–Z review to ensure we have a thorough understanding of the client’s total needs before confirming approval,” he says.
Of all these requirements, the most important is that both broker and lender understand a client’s business plans. At Suncorp they look to build a profile of the borrower’s business. “We would recommend that our brokers have an exploratory conversation with their customers about their business plans and operating environment,” Frost says. They also require an accountant-prepared balance sheet and profit and loss statements, while reviewing the borrower’s credit history.
The depth of understanding required by the broker increases with the complexity of the loan. In the case of credit-impaired self-employed borrowers you also need to build a background of their past and any defaults or bankruptcies that have occurred, advises La Trobe’s Bannister. “It is important to understand why it happened, what the solution is to fix it, and how it will impact them moving forward,” he says. La Trobe also asks the client to self-certify their income, and provide one of the following: accountant’s certification of that stated income, BAS statements, or business trading account statements, together with two years’ financials if possible.
Different lenders have various levels of tolerance of credit histories. ANZ considers a clear credit history to be “extremely important”; Suncorp assesses on a case-by-case basis; Bluestone, La Trobe and Liberty pride themselves on being able to serve credit-impaired clients. Liberty boss Mohnacheff notes that the security behind the deal is very important. “In addition to offering conventional finance based on standard income and employment verification, we offer investors the ability to purchase or refinance commercial property relying just on the strength of the underlying asset.” They also require six months’ business or personal bank statements, then either two quarters worth of BAS statements or a completed accountant’s declaration.
While the variety of documentation lenders require can be confusing, the basic approach the broker needs to take is fairly simple. “I think it’s just about being upfront; knowing exactly where you stand rather than the broker wasting their time with applications that can’t go ahead,” Bluestone BDM Ebony Maxwell recently told MPA. To avoid things going wrong later in the process, she advises brokers to ask even those questions that might seem obvious, such as do they have tax debts? And if they’re asking for cash-out, what’s its purpose?
CASE STUDY: LEASEDOC TO REPAY ATO DEBT
A self-employed applicant had been operating their business for six years and, due to mismanagement by their previous bookkeeper, had accumulated a significant ATO debt of $220,000.
The applicant owned a commercial property worth $1,250,000, which was mortgaged to a major lender for
$400,000. The property was leased to a local retailer in 2014 for a five-year term at an annual rent of $70,000 per annum.
The applicant was looking to refinance the existing debt to obtain cash-out against this commercial property to repay the ATO debt, cover costs and provide an additional $100,000 working capital.
Following lodgement of the application, the applicant discovered a trade-related default for $35,000, also a result of mismanagement by the now-terminated bookkeeper.
We identified these credit issues as being the result of one ‘credit event’ – being the substandard bookkeeper and were able to approve a loan for $775,000, achieving repayment of all outstanding debts, releasing working capital, and covering costs using our LeaseDoc product.
Serviceability for this loan was achieved simply by evidencing the lease agreement, which provided sufficient income to meet the loan repayments.
The flexibility of our product suite, combined with our fully customised assessment techniques, allowed us to consider the scenario on its merits to find a suitable solution.
Partnering with self-employed clients
As leading brokers look to move from a transactional to a long-term relationship, the hunt is on for clients who have genuine long-term needs, beyond the odd refinancing opportunity. Self-employed clients are perfect clients in this regard, because they have many of the needs of a business customer, coupled with those of a homebuyer.
“Approximately 30% of our home loans are for self-employed borrowers,” Suncorp’s Frost told MPA, “which highlights the opportunity for our broker partners to cross-sell. The important part for brokers is to have the confidence to have exploratory conversations with customers beyond their personal borrowing needs”.
Suncorp notes that their self-employed customers are also interested in offset accounts, merchant and payment services, smaller unsecured overdrafts and credit cards. While these aren’t necessarily products which need a broker intermediary, they can help a broker consider which bank to direct a client to, while continuing to present themselves as a trusted adviser and useful time-saver.
In addition to asset finance, many self-employed clients are looking to do more with their SMSFs. Bannister says La Trobe has “seen an increase in the number of self-employed clients moving into self-managed super funds; the borrower’s aim being purchasing the premises from which they operate their business from within their SMSF, as often this can be a tax effective strategy.” The broker, Bannister adds, can provide further assistance to their client by providing insurance protection for the client’s business and personal assets.
Any move involving SMSF structuring will most likely require a broker to work with a client’s accountant and possibly financial planner, and the broker should take the initiative and establish links. Accountants’ declarations play an important role in the initial loan application, and as Bluestone BDM Maxwell observes, the most productive brokers she deals with have strong referral relationships with such professionals, providing more self-employed clients and starting the whole cycle again.
Next steps
With self-employed clients, there’s no need to wait around: look at your residential database now and work out which clients are likely to be self-employed. See if they’re likely to need commercial finance, while establishing new referral relationships and possibly marketing to local businesses to bring in new clients. If you’re concerned about the complexity of the loan application, most lender BDMs advise you call them and run through the application prior to commencing it. Suncorp says it runs SME masterclasses for brokers, and this year the MFAA, in conjunction with FAST and ANZ, also launched new commercial lending training modules. Finally, have a read of the rest of this supplement to see where self-employed clients can take you.
Self-employed clients can make the process of diversification a lot quicker; you’ll be less likely to need specialist marketing as you’ll be starting with your residential database. Self-employed borrowers do, however, require a great deal of care and attention; with a mix of residential and commercial debts, an absence of paperwork and complicated tax arrangements, self-employed deals are rarely vanilla deals.
To equip you to make the move, this guide features expert guidance from the commercial teams at Suncorp, ANZ Bank, Liberty Financial and Bluestone Mortgages, covering borrowers with clear and more complex credit histories. Bear in mind that this article mainly concerns borrowers without PAYG documentation who may also have an existing residential debt relation-ship with the broker. For self-employed clients who wish to acquire property, gain unsecured expansion finance or restructure their cash flow, we’d advise you to read the other articles in this supplement.
Finding self-employed clientsIf you have a database of residential clients or leads, and know their professions, you can start to pick out potential self-employed borrowers based upon their industry. According to Cory Bannister, vice president and chief lending officer at La Trobe Financial, “the self-employed borrower was once typically a blue-collar worker, likely to be your local plumber, electrician, builder, etc”. These professions still play a very important role – as Suncorp explains, the two most common industries for self-employed people are construction and health-related services. At Liberty Financial they also see a large number of tradespeople, freelancers and contractors.
However, there’s also a new generation of self-employed borrowers emerging who could be equally important for brokers. “Most recently, we have seen a rise in the online entrepreneur space as part of the current innovation push,” explains Bannister. “Whether it is an online retailer or an online service provider, this area has moved so fast we are finding other lenders caught off guard in how to deal with the changing self-employed landscape.”
This new generation doesn’t just work in retail – at Liberty Financial they also deal with those in the creative industries, such as artists and musicians. These clients are only going to become more important; innovation is being championed by the Australian Government, and this support doesn’t just extend to glossy TV adverts; 2015’s Federal Budget included $5bn in tax relief for small businesses, and since then Malcolm Turnbull’s accession to prime minister has only intensified government support for innovative businesses.
You’ll also find self-employed borrowers in the high net worth space, including doctors and healthcare professionals, lawyers, accountants and other financial service operators. They’re a growing sector: La Trobe has seen an increase in these clients as financial professionals increasingly leave corporations to act in self-employed consultancy roles.
Healthcare professionals are a crucial group, because several of the banks offer them particularly generous LVRs and serviceability terms. As a group they’re also relatively wealthy and extremely short on time, so have a natural need for a broker. Indeed, broker Louis Kovanis of Genius Loan Solutions used his specialism in high net worth healthcare professionals to climb to a Top 10 position in MPA’s 2015 and 2016 Top 100 Brokers lists.
Engaging with self-employed clients
If, like Kovanis, you’ve identified a likely client sector, you’ll need to engage with those potential clients. Don’t rush into a marketing strategy, advises Robynne Frost, Suncorp Bank national manager for small business and commercial. “The first thing before you implement any new marketing strategy is to make sure you understand what is important to that market.” This means researching what self-employed clients want, and using your existing clients as test cases, Frost explains. “Start asking more questions and completing needs assessments with your customers to assess small business lending opportunities.”
What Suncorp has found is that self-employed clients “are typically time-poor, digital savvy, and committed to saving money”. It wasn’t the only lender to emphasise that self-employed clients are short on time; Cosi De Angelis, general manager of commercial origination at ANZ, warns brokers to “be flexible as these people are running businesses during the day and generally don’t have time. Embracing technology will certainly assist in this regard but so will building a good referral network from people that support small businesses, like accountants and solicitors as well as local chambers of commerce, etc”.
La Trobe, Liberty and Bluestone insist that referral partnerships with accountants and financial planners are crucial, but they also have a number of other suggestions. John Mohnacheff, national sales manager at Liberty, notes that “local sports and community clubs and local business networks are also good ways to secure qualified leads”. Additionally, Bluestone’s national manager of sales, marketing and distribution Royden D’Vaz previously told MPA that “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”. D’Vaz suggests brokers research these areas and target their marketing spend accordingly.
Marketing now means more than just advertising, of course. La Trobe vice president Bannister suggests that by partnering with accountants and other professional services “brokers can target local small businesses by running seminars which may include topics such as purchasing your business premises through your SMSF; consolidating business debt through refinancing; and managing ATO obligations and business expansion strategies”. He also emphasises the importance of social media as an increasingly powerful referral source.
As in residential lending, an initial burst of effort on the marketing front can reward the broker with valuable repeat clients. Geoff Rees set up his brokerage Mortgage Watch in 1993 and now has the grandchildren of his original clients coming to him for finance. Talking to MPA for a recent article on the self-employed market (MPA 16.3), Rees emphasised that his clients saw him as a the convenient go-to option. “They know I can put everything in writing and give them the main options anyway, and we can often give them a better deal because we’re privy to some of the other specials, and a layperson is going to have a hard time researching all this,” Rees said.
Writing loans for
Once you have the client, you’re finally at the stage when you can start writing loans. Self-employed clients could be looking for commercial property finance, residential finance, equipment and asset finance for new tools (particularly trade vehicles) or, as in our case study (see boxout, p22), refinancing to address other debts. With so many different demands there are a correspondingly high number of products; we’ve asked lenders to describe these in the product guide at the end of this article.
The most obvious challenge when dealing with self-employed borrowers is the lack of a payslip. Lenders have different ways of addressing this. At ANZ, applicants will require a business plan, a cash flow forecast, financial statements and a personal statement of the positions of their directors, explains De Angelis, in order to build a picture of the client. “ANZ, with the assistance of a broker, will conduct an A–Z review to ensure we have a thorough understanding of the client’s total needs before confirming approval,” he says.
Of all these requirements, the most important is that both broker and lender understand a client’s business plans. At Suncorp they look to build a profile of the borrower’s business. “We would recommend that our brokers have an exploratory conversation with their customers about their business plans and operating environment,” Frost says. They also require an accountant-prepared balance sheet and profit and loss statements, while reviewing the borrower’s credit history.
The depth of understanding required by the broker increases with the complexity of the loan. In the case of credit-impaired self-employed borrowers you also need to build a background of their past and any defaults or bankruptcies that have occurred, advises La Trobe’s Bannister. “It is important to understand why it happened, what the solution is to fix it, and how it will impact them moving forward,” he says. La Trobe also asks the client to self-certify their income, and provide one of the following: accountant’s certification of that stated income, BAS statements, or business trading account statements, together with two years’ financials if possible.
Different lenders have various levels of tolerance of credit histories. ANZ considers a clear credit history to be “extremely important”; Suncorp assesses on a case-by-case basis; Bluestone, La Trobe and Liberty pride themselves on being able to serve credit-impaired clients. Liberty boss Mohnacheff notes that the security behind the deal is very important. “In addition to offering conventional finance based on standard income and employment verification, we offer investors the ability to purchase or refinance commercial property relying just on the strength of the underlying asset.” They also require six months’ business or personal bank statements, then either two quarters worth of BAS statements or a completed accountant’s declaration.
While the variety of documentation lenders require can be confusing, the basic approach the broker needs to take is fairly simple. “I think it’s just about being upfront; knowing exactly where you stand rather than the broker wasting their time with applications that can’t go ahead,” Bluestone BDM Ebony Maxwell recently told MPA. To avoid things going wrong later in the process, she advises brokers to ask even those questions that might seem obvious, such as do they have tax debts? And if they’re asking for cash-out, what’s its purpose?
CASE STUDY: LEASEDOC TO REPAY ATO DEBT
A self-employed applicant had been operating their business for six years and, due to mismanagement by their previous bookkeeper, had accumulated a significant ATO debt of $220,000.
The applicant owned a commercial property worth $1,250,000, which was mortgaged to a major lender for
$400,000. The property was leased to a local retailer in 2014 for a five-year term at an annual rent of $70,000 per annum.
The applicant was looking to refinance the existing debt to obtain cash-out against this commercial property to repay the ATO debt, cover costs and provide an additional $100,000 working capital.
Following lodgement of the application, the applicant discovered a trade-related default for $35,000, also a result of mismanagement by the now-terminated bookkeeper.
We identified these credit issues as being the result of one ‘credit event’ – being the substandard bookkeeper and were able to approve a loan for $775,000, achieving repayment of all outstanding debts, releasing working capital, and covering costs using our LeaseDoc product.
Serviceability for this loan was achieved simply by evidencing the lease agreement, which provided sufficient income to meet the loan repayments.
The flexibility of our product suite, combined with our fully customised assessment techniques, allowed us to consider the scenario on its merits to find a suitable solution.
Partnering with self-employed clients
As leading brokers look to move from a transactional to a long-term relationship, the hunt is on for clients who have genuine long-term needs, beyond the odd refinancing opportunity. Self-employed clients are perfect clients in this regard, because they have many of the needs of a business customer, coupled with those of a homebuyer.
“Approximately 30% of our home loans are for self-employed borrowers,” Suncorp’s Frost told MPA, “which highlights the opportunity for our broker partners to cross-sell. The important part for brokers is to have the confidence to have exploratory conversations with customers beyond their personal borrowing needs”.
Suncorp notes that their self-employed customers are also interested in offset accounts, merchant and payment services, smaller unsecured overdrafts and credit cards. While these aren’t necessarily products which need a broker intermediary, they can help a broker consider which bank to direct a client to, while continuing to present themselves as a trusted adviser and useful time-saver.
In addition to asset finance, many self-employed clients are looking to do more with their SMSFs. Bannister says La Trobe has “seen an increase in the number of self-employed clients moving into self-managed super funds; the borrower’s aim being purchasing the premises from which they operate their business from within their SMSF, as often this can be a tax effective strategy.” The broker, Bannister adds, can provide further assistance to their client by providing insurance protection for the client’s business and personal assets.
Any move involving SMSF structuring will most likely require a broker to work with a client’s accountant and possibly financial planner, and the broker should take the initiative and establish links. Accountants’ declarations play an important role in the initial loan application, and as Bluestone BDM Maxwell observes, the most productive brokers she deals with have strong referral relationships with such professionals, providing more self-employed clients and starting the whole cycle again.
Next steps
With self-employed clients, there’s no need to wait around: look at your residential database now and work out which clients are likely to be self-employed. See if they’re likely to need commercial finance, while establishing new referral relationships and possibly marketing to local businesses to bring in new clients. If you’re concerned about the complexity of the loan application, most lender BDMs advise you call them and run through the application prior to commencing it. Suncorp says it runs SME masterclasses for brokers, and this year the MFAA, in conjunction with FAST and ANZ, also launched new commercial lending training modules. Finally, have a read of the rest of this supplement to see where self-employed clients can take you.
