Less is more

An important sector

According to Suresh Pillai, general manager at Liberty Finance, small business owners and the self-employed make up a significant proportion of the borrowing market.

“The last stat I saw was that the sector was at about 18 per cent of the Australian workforce,” he says. “One in five of the people that a broker is seeing is likely to be self-employed or a small business owner.”

According to Mr Pillai, the primary need of small business people is to optimise their cash flow. “They are looking for cash flow solutions, either to expand their business or consolidate debt to deal with, for example, ATO requirements,” he says.

“So I think one of the primary concerns for small business people is good management of cash flow, and that’s where we can provide assistance.”

Greg Sly, finance broker at FrontRunner Finance Solutions, says there are a range of benefits for brokers when it comes to looking after the needs of self-employed borrowers.

“These clients need finance and often will borrow multiple times, rather than the slower home loan turnover,” he says. “As brokers, there is a huge opportunity to meet this sector’s financing needs from experienced commercial lenders who have the best interests of the client at heart.

“The broker can provide their experience in structuring deals and also seek out the best rates and fees to meet the client’s needs, from a range of lenders.

“Brokers can become their client’s truly independent relationship manager. A beneficial contingency of looking after small businesses is that they have a significant number of employees that you can also service through the traditional consumer broker market.”

Brokers should consider what kind of finance their small business owning clients are looking for and how to best manage it. Here, we look at three of those finance types: debtor finance, personal loans and leasing.

Debtor finance

Debtor finance is a less frequently used type of finance – one that businesses can use to enhance their cash f low position, Mr Sly says. Unlike overdrafts, debtor finance does not require real estate security and is a self-liquidating facility, meaning the business isn’t taking on any additional debt.

“The finance provider purchases the trade debts from a business and pays up to 80 per cent of the value of the debt within 24 hours, at a cost, and this needs to be fully investigated by the business to ensure it is the best product for their needs,” Mr Sly says.

“There are two main types of debtor finance – invoice factoring and invoice discounting.

“The major difference is that with factoring, the responsibility of collecting the outstanding debts lies with the finance provider and not the business.”

This means the finance provider will handle the collections and accounts receivable on behalf of the business. “This type of finance is not readily available from the majors and is more a second-tier product accessed from specialist lenders,” he says.

Personal loans

Lenders often have more stringent conditions for businesses than for residential lending and often over reduced terms at a higher interest rate and with a less favourable fee rate.

“This is justified by the ‘increased’ risk of business versus consumer borrowing,” Mr Sly says. As such, personal funding may not be available for businesses under certain credit legislation.

“An experienced broker may be able to fully comply with all legislation and provide business clients with competitive borrowings by using a mix of consumer and business products sourced from a range of lenders, not just the client’s own bank,” he says.

Leasing

According to Mr Sly, small businesses now have a range of financing available for motor vehicles and plant and equipment – and the current market is very competitive. The three most common types of asset finance, he says, are leasing, hire purchase and chattel mortgage.

Each provides different benefits depending on the customer’s needs. “Brokers have the opportunity to structure the deals, in consultation with the client’s accountants, to maximise the taxation benefits and utilise a repayment structure to best suit their cash flow needs,” Mr Sly says.

“In the majority of cases, the vehicle or goods will secure the loan.

“While some manufacturers and dealers are currently offering ‘loss leads’ on their motor vehicles by low or zero interest rates, it is often limited to a certain brand or model and normally there will be no discounts on the purchase price available.”