Pearl Financial Services managing director Nathan Keating debunks some of the myths associated with the commercial lending space.
What are some of the unknown opportunities available for brokers within the commercial lending space?
Many business people have never thought to engage a broker to do their bidding for them. However, as banks get more and more challenged by regulation and are becoming more selective about the deals they should do and which clients they should bank for, businesspeople are coming to realise the value of appointing a professional to assist. This is great for brokers who are experienced at dealing with the banks.
Commercial deals vary in complexity. The challenge for a broker who is not experienced in dealing with corporates is that to be able to get in front of a bank's concerns about your client, you do need to know how to read business financials and proactively identify concerns that a lender might have.
What is one of the main differences between residential lending and commercial property lending?
One difference between commercial and residential is the fact that clients will actually pay you to help them stay where they are. Our bank management service recognises that there is seldom a commercial advantage in changing banks for a business. Clients in these instances will often gladly pay us a monthly retainer to help them report and maintain an existing bank relationship as an alternative, on the basis that we reduce the uncertainty and reduce the time taken in effectively managing this key stakeholder for the business.
What is the biggest myth brokers have about commercial lending?
That commercial lending is an easy way to make some extra cash. Commercial deals take considerably longer than residential deals and, as such, there is a longer period for things to go wrong. Clients lose interest, banks change their mind, incumbent banks counter-offer. A client needs to be focused on leaving and the process has to go smoothly and quickly for the deal to come off.
What’s been the feedback from your clients since choosing to offer commercial?
Our clients never realised the advantage of having a banker on their team. We are making a tangible difference to the price, the structure, the amount of security and the loan amounts that our clients are receiving from their bank. [However], the really surprising thing for us and the clients are the indirect benefits. Our clients are building improved financial-management practices, increasing the levels of cash in the business – and by significantly reducing the headache of an angry bank, they have more time to work on their businesses.
What percentage of your total loan book is made up of commercial lending?
Eighty-five per cent.
How supported are you in this space?
We don’t feel well supported. While some bankers get it, others feel threatened by having us in between them and our mutual clients. They do what they can to undermine our client relationships. Bankers also chop us out of receiving commissions. The banks would be the largest hurdle.
That said, the banks that do understand our value are awesome. We channel considerable volumes their way as a consequence, as well as helping write their credit papers and generally making their lives easier. Maybe one day the rest will work out that we are here to help. We need banks, so we need them to see us as valuable contributors in the finance ecosystem.
Do you have any advice for brokers looking to enter this space?
To be truly effective, you need to understand financial management and you need to be able to read financials fluently. Perhaps pair up with an experienced commercial banker in the first instance. Learn the ratios that are important, understand the warning signs that differentiate a good business from a bad one.
What do you think the future holds for brokers in commercial lending?
The bank appetite for commercial broker-introduced deals is growing. This will continue, and eventually banks will separate the channels completely, with brokers having their own credit partners, acting much like a relationship manager, but with multiple bank channels.