Brokers are being urged to have conversations with SME owners about the availability of commercial finance options that allow business owners to separate personal finances from business loans.
Online small-to-medium enterprise (SME) lender OnDeck has noted that the increase in property values in state capitals over the past quarter may encourage SME owners to rely on home equity to secure business finance.
But OnDeck has warned that three-quarters of SME lending is already collateralised, typically with the family home acting as security, which can concentrate risk for SME owners.
OnDeck Australia CEO Cameron Poolman cited recent media reports stating that around eight out of 10 SMEs have business finance secured against the owner’s home, which may rise following the growth in property values.
“The risk is that relying on home equity blurs the line between business and personal assets, which can put an SME owner, and potentially their family, in financial jeopardy if the business fails.”
National dwelling values increased 4 per cent in the three months to December 2019, the fastest growth rate seen over a three-month period for 10 years, according to CoreLogic.
Residential property prices increased across all capital cities in January as well, but the rate of growth was more subdued than in previous months.
CoreLogic reported a 0.9 per cent increase in national home values in January.
Mr Poolman said the sustained rise in property values since mid-2019 could lead to more SME owners opting for home equity as a source of business finance.
This strategy concentrates risk for SME owners and their families, he warned.
Speaking to The Adviser, Mr Poolman said that when an SME owner relies on home equity to secure commercial finance, they may view it as a mere formality.
“But it is far from that,” Mr Poolman said.
“If the business fails – be it from changed trading conditions, ill-health of the owner, a change in the regulatory environment, or completely unforeseen issues such as the recent bushfires or coronavirus – the commercial loan still needs to be repaid. If the business cannot meet those repayments, the lender has the right to claim their stake in the family home (the loan security) to make good on the loan.
“It’s worth noting that even if the business doesn’t struggle, using home equity for SME funding limits the business owner’s ability to use their home equity for other personal purposes such as home improvements or even funding their child’s education.”
Mr Poolman said brokers have an opportunity to educate SME owners on commercial finance and assist them with the application and settlement process.
“OnDeck research shows that as many as one in four of a broker’s home loan clients [is] also likely to be [an SME owner],” he told The Adviser.
“So, the broker is already likely to have a relationship with the client and an awareness of their circumstances and goals. This relationship is important as SME owners need to understand exactly what they are signing up for with commercial finance, and they are often more comfortable asking brokers questions that they may not pose to the business development manager of their local bank.”
Brokers can also often advise their SME clients on loan structures that business owners may not be aware of.
Mr Poolman also opined that adding commercial finance to a brokerage’s offering is an opportunity for a broker to diversify their business.
“It makes good business sense for a broker to serve multiple needs from the one client rather than, say, arranging their home loan but then sending them elsewhere for their business finance,” he said.
OnDeck research found that one in four SMEs plans to seek additional business finance in the future, while 39 per cent of SMEs with six to 10 employees plan to do the same. This figure rises to 56 per cent of SMEs with 11-49 employees.
The lender also found that one in four SMEs has been rejected for bank finance, and this rises to 37 per cent among businesses that have been in operation for less than five years.
The research further showed that many businesses are not aware of alternative options, with one in three who had been rejected for bank finance going to family or friends, or resorting to their personal credit card as a source of business funding.
Close to one-third, or 30 per cent, of SMEs that have applied for bank finance said their business was negatively impacted by the experience.
[Related: Brokers urged to ease SME ‘debt hangover’]