How a broker can service self-employed clients

“If you look at how a bank would typically look at a self-employed borrower, they look at their historical performance and they generally look at the last two years as a gauge,” Mr Fisher told The Adviser’s In Focus episode.

“They look at the success of the business through their financials, and it’s very black and white on how they assess that.”

However, Mr Fisher said that approach might not be optimal for self-employed borrowers in the current environment as their current income might be “nowhere near reflective of what their true business performance is”.

He said banks might have to adapt their processes to suit SME borrowers’ current circumstances, and retain those processes over the next year.

“If you’re a broker and you’re just looking at bank-type lending, you’re going to really limit the options that you avail to your clients,” Mr Fisher said.

Furthermore, Mr Fisher noted that some SMEs and self-employed borrowers who enacted hardship arrangements and deferred their loans during the COVID-19 crisis did not necessarily require those arrangements, adding that some businesses might have entered into those repayment holidays because of the uncertainty about their near-term future.  

“What we’re starting to see is a lot of those people took those facilities out because they thought it was in their best interests. They’ve heard it a lot over the media, and they thought, ‘OK, I should do this because I don’t know what’s going to happen over the next coming months with COVID’,” Mr Fisher said.

“But in reality, when we look at those clients a little deeper, they actually didn’t need to take up those repayment holidays. They had cash reserves, they still had money coming through their business. They still had government support that was there for them.

“And like most people who have been through the lockdowns, especially in Victoria, you realise that it’s been very difficult to spend a dollar because you can’t go and do anything.”

The federal government recently extended and launched the second phase of the Coronavirus SME Guarantee Scheme, under which it quadrupled the maximum loan size from $250,000 per borrower to $1 million per borrower, while allowing secured products and increasing the previous three-year limit to five years.

The first phase of the scheme was criticised for its shortcomings by banks, brokers and non-banks alike, and saw limited uptake of the loans.

Mr Fisher recommended that brokers should have a panel of lenders that can cover the “full spectrum” of lending that their self-employed borrower clients may require.

“There are a lot of lenders like RedZed, and a myriad of others that will look at things differently,” Mr Fisher said.

“They don’t just necessarily need those two-year financials and take a black-and-white approach to them. We will look at other things that play into account. So, there’s a lot of alternative ways that you can actually assess the performance of the business.”

Tips for brokers servicing SME clients

Mr Fisher also advised brokers to form relationships with their self-employed clients’ accountants and conduct conversations with them.

“It’s amazing the conversations you can actually have with the accountants when you ring up and explain to them that we understand that they do tax returns – when they’re under the process of compiling those tax returns for their client, they have a number of things that they can do to reduce their taxable income down,” Mr Fisher explained.

“A lot of those things that are non-cash-related items that they can do to reduce the taxable income down.”

Mr Fisher said that when brokers form these relationships, accountants would reciprocate by providing brokers with insights that would enable them to gain deeper insight into an SME’s roadmap for their business.

In addition, when it comes time to submit applications to a lender (be they a bank, non-bank lender or an asset finance specialist) for a prospective SME borrower, Mr Fisher advised brokers to design submissions in a way that highlights their borrower’s strengths and weaknesses, as this will provide lenders with mitigants to those weaknesses.

“I have been in banking and finance for over 30 years, and I’ve seen a lot of credit teams, and the thing that they hated there is when it looks like a borrower or a broker is trying to hide weaknesses in an application,” Mr Fisher said.

He concluded: “Don’t try and hide them.”

To listen to the full In Focus episode with RedZed national sales manager Adrian Fisher, click here:

[Related: In Focus: Helping self-employed clients when they need it most]