As most brokers would know, running a small business is no easy task. Find out what challenges your SME clients are up against and how brokers can help them succeed
“Business conditions are holding at the best levels in over nine years,” wrote CommSec senior economist Savanth Sebastian in an August 2017 Economic Insight. The update also revealed that business borrowings have surged. “The strength in business conditions is seemingly translating through to a lift in commercial and lease loans – although it is still early days,” Sebastian said.
According to the CommSec update, commercial finance increased by 13.7% in June, up 29.6% on the previous year, after falling 6.9% in May. Fixed lending within the commercial space was up 10.8%, while revolving credit rose by 25.9%.
However, brokers, who are often small business owners themselves, know well that maintaining and growing a business is no easy journey. Although business conditions and sentiment are up, Suncorp’s SME Vs Me Report (2017) revealed that many SMEs continue to report that each year they find it more difficult to run a business. MPA heard from lenders ING DIRECT, Thinktank and Suncorp on the challenges facing SMEs in 2017 and how brokers can help them through.
Challenges for Australian small businesses
Often referred to as the ‘engine room’ of the Australian economy, small businesses make up 99% of all businesses and contribute $380bn to the economy. In its Budget 2017/18, the government said it was creating the right environment for Australian small businesses to thrive, of which there are over three million. Its main points involved reducing the tax burden to help SMEs invest and grow; extending the $20,000 instant asset write-off for another 12 months to 30 June 2018; and lifting the turnover threshold to $10m. The government said the measures would bolster cash flow and small business activity, giving SMEs more flexibility to recruit staff and boost wages.
Peter Vala, head of sales and distribution at Thinktank Commercial Finance, believes the latest budget is good news for any SMEs associated with infrastructure. “Whether they are in labour hire, equipment hire, surveying, engineering, other peripheral services or the supply of a range of necessary physical products, it is a generational period for this sector, which looks set to remain vigorously supported by both sides of government for several years yet,” he says. “The commitment to reducing red tape looks good but, like most, we’ll believe it when we see it. Likewise, reducing the tax rate over 10 years will be a welcome development for all corporate SMEs, yet how much of that is finally enacted remains in question.”
A recent report by Prosperity Advisers Group listed ASIC’s top three nominated reasons businesses end up collapsing as inadequate cash flow or high cash use; lack of effective strategic management; and trading losses. Vala adds that other common challenges predominating in 2017 include investing in innovation, customer satisfaction, loyalty, time management and rising utility costs. “For our part, the most recurrent and persisting challenges tend to come down to managing cash flow through the typical cycles associated with small business; and having suitably structured finance arrangements in place across property, equipment, working capital, debtors and stock remains a critical piece.”
“Your average SME needs to borrow more, and they need to borrow more regularly” - John Kolyvas, ING DIRECT
Consumer confidence naturally has a flow-on effect on the success of a small business, and ING DIRECT’s treasurer, Michael Witts, points out how understanding the consumer outlook can be a challenge for SME owners. “The consumer side of the economy is dealing with very high levels of household debt, and minimal wages growth; they’re running down their savings, and that’s eroding consumer sentiment and consumers’ confidence.” In contrast, he says current low interest rates are contributing to a fairly optimistic business sentiment. “So there’s a mismatch between what the businesses think is going to happen and what the consumers are happy to spend to make happen.”
“For our part, the most recurrent and persisting challenges tend to come down to managing cash flow through the typical cycles associated with small business” - Peter Vala, Thinktank Commercial Finance
John Kolyvas, ING DIRECT’s national sales manager, commercial, adds that an ongoing challenge for SMEs is finding and retaining staff. “Unemployment remains reasonably low and it really is difficult to find and more importantly to retain good staff.” Along with managing staff, Kolyvas says changes in the banks’ lending appetite is another area SMEs need to keep in the loop with. “It’s a volatile period at the moment and banks are regularly reviewing what their appetite is for certain sectors, and that could impact a lot of SME customers without them even knowing that they’re going to be impacted.”
Although business conditions are upbeat, with NAB’s Moments That Matter report (March 2017) showing its index rose 2 points to +14 index points, a record high since early 2008 and well above the long-run average of +5, many SMEs appear to be feeling strained.
Referring to its SME Vs Me report (2017), Suncorp’s national manager small business and commercial, Robynne Frost, pointed out that more than two thirds of owners have experienced personal challenges such as fatigue, financial stress, loss of motivation and even relationship strain as a result of work-related issues. “They believe that they are having to run hard to stay in the same spot. In fairness, that’s a comment we’ve been hearing since the GFC, but we are hearing it more consistently than ever.”
When it comes to cash flow management, the report also found that one third of SMEs rely on personal finances to manage their cash flow. “Despite more than half of SMEs admitting it’s important to keep personal and business finances separate, our findings highlight that many SMEs prioritise their business over their personal wealth and wellbeing,” Frost says.
BIG AND LITTLE WORRIES
Some things keep SMEs awake at night more than others.
• Neglecting business planning: just 22% of owners have a specific plan to improve the value of their businesses
• Neglecting succession planning: although 49% believe it to be an urgent need, 90% of business owners do not have a succession plan at the ready
• Selling their business (and getting the highest price)
• Access to funding
Value of an SME client
The SME client can be a valuable addition to your customer base for more reasons than one, and many business owners are in more need of a trusted broker than they, or even you, may realise. in comparison to the average residential client, ING DIRECT’s Kolyvas says: “Your average SME needs to borrow more, and they need to borrow more regularly. They’re investing in their business all the time, and they’re usually buying because they need money to make money. So, in that sense, your average SME would be highly valuable to a broker.”
“Self-employed brokers have an inherent capability to position themselves as trusted advisers to these customers, because they are small business owners themselves” - Robynne Frost, Suncorp
Long-term SME clients are the most valuable to a broker, according to Thinktank’s Vala. “A broker that can continually anticipate and respond to clients’ needs over time place themselves in a position of trust and will be the first person called when the next need comes up. Some transactions or engagements might occasionally end in little or no revenue, but with a strong and trusted relationship in place, value will be produced both directly through commissions and indirectly through positive referrals and introductions.
“Other transactions though, such as a property purchase, refinance or equity release, can see high levels of upfront and trail commission earned. As SME clients commonly have a wide range of financial and advice needs, the value spectrum is a wide one that can benefit a broker’s business in many ways.”
The massive size of the SME market in itself offers a prime growth opportunity for brokerages, Suncorp’s Frost says. In addition, she points out that 30% of a broker’s existing customer base is often made up of SME clients, so if you’re a broker who is already specialising in the commercial lending space, it would be worth your time having deeper conversations with these clients to uncover what matters most to their businesses and identify opportunities that go beyond just a home or commercial loan.
Even if you are a broker who deals mainly with residential clients, ING DIRECT’s Kolyvas says if your residential customer happens to be a small business owner, a full needs analysis may identify further business borrowing needs.
And as if SMEs weren’t valuable enough already, Frost highlights an extra bonus they offer, as brokers may learn some useful ways to strengthen and grow their own brokerages by listening to and learning from their small business clients.
What’s more, Kolyvas says your average SMEs are often savvy, effective networkers. “They’re more involved with other similar business people, so if you’re doing a good job of looking after their needs, the word can spread quite quickly – a lot quicker than what it would be if you just focused on consumers.” Witts adds: “SMEs really want someone who is a trusted adviser who can actually understand their business model and their exposures and assist them in managing those risks accordingly.”
Helping your SME clients
Without a doubt, having SMEs making up some portion of their client base can offer many benefits to a broker, but how can brokers make sure they are maximising their value to the SME?
“The brokers need to have an affinity with what their small business clients are going through,” says ING DIRECT’s Witts. Brokers should stay ahead of the curve on changing lender appetite by regularly checking in with the lender BDMs and having in-depth discussions with broker peers, Kolyvas suggests. “When it comes to commercial lending, there’s a lot of commercial specialist brokers and they’ve got a good handle on bank appetite because they’re putting up transactions on a regular basis and they can see the tides changing quite early.
“It’s not unusual for a good commercial broker to sit in front of their business customer once a year and do a full review – and that’s not a banking review, that’s also a business review,” he says. This can also be undertaken with the customer’s accountant, “because the accountant will also have a good understanding of what’s happening in the business and what might be coming up”.
Thinktank’s Vala says new opportunities could involve “debtor finance or restructuring and consolidating commitments to ease the burden on cash flow and increase profitability. It might be offering different insurance options or introducing them to the advantages of a self-managed super fund where appropriate. There is no substitute, however, for just keeping in regular contact with small business clients, listening to them and then acting or connecting them with other advisers who can help with specific needs.”
Doing as much research as possible before a client meeting can be beneficial for both parties, Vala says. “Find out what you can about the client’s industry, and where their business sits within it. Get a sense of the influences that have been and will drive their market, and know what the key issues look to be. Request their most recent set of financial statements and review their personal SP to see how things have been trending both in business and away from it, as often the two are closely linked.”
SMES NEED HELP TO GROW
Many businesses want to grow but are just not sure how to go about it
77% of business owners have no detailed plan for their businesses’ future growth
31% have no trusted adviser
44% are working to improve business and financial management skills, but the remainder can’t find time in their day to make a detailed plan
Source: SME Research Report 2016/17 – Prosperity Advisers Group
Vala says you should cover the whole spectrum with your client, from major concerns in their day-to-day operations all the way through to their retirement plans. “Armed with this knowledge, the follow-up can involve either a high-level step-by-step plan or a more comprehensive summary document that identifies notable issues, possible needs and potential areas where you can add value to that client and his or her business.”
Suncorp’s Frost believes it’s worth the broker’s while to make it as easy as possible for SMEs to reach out to them for help. She says four factors that influence who SMEs choose to do business with include regular contact points, as 41% of SMEs rate highly consistent and easy interaction with their broker; knowledgeable staff, as 78% of SMEs value monthly or quarterly contact with staff who have a strong knowledge base to help with their business needs; and a hassle-free switchover offering the right products, an easy onboarding process and speed.
Four in 10 Australian SMEs report that they look to a trusted adviser to work through their business challenges, Frost says.
“Significantly, this adviser is not necessarily a professional, such as an accountant, so that highlights a huge opportunity for both SMEs and brokers,” she suggests.
“Self-employed brokers have an inherent capability to position themselves as trusted advisers to these customers, because they are small business owners themselves.”