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The assets of asset finance

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The assets of asset finance

Huntley Mitchell 12 minute read

From small businesses to families, there seems to be no shortage of asset finance clients for brokers to service

With well over two million SMEs across Australia, you can guarantee that plenty of them are in search of financial relief when it comes to securing a new vehicle or piece of machinery to better their growth and productivity.

You can also guarantee that as a mortgage broker, a fair chunk of your existing and potential client base are self-employed, and may be in need of access to new equipment without incurring the cash flow disadvantage of purchasing it outright.

The benefits of this type of finance solution for the client are pretty obvious. The amount of flexibility when it comes to selecting the repayment terms and schedule allows clients to tailor it to their cash flow situation, enabling them to budget more effectively. And provided that the client is using the asset to generate assessable income, it could be tax-deductible.

Frank Crombie, director of aggregation services at NLG Leasing, says he is witnessing first-hand massive demand for asset finance.

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Recent analysis of the Victorian-based group’s portfolio revealed a 400 per cent increase in loan applications to SMEs for the 12 months to October 2015, which Mr Crombie attributes largely to the federal government’s relatively new legislation that allows businesses with a turnover of less than $2 million to receive an instant tax deduction of $20,000 for the purchase of items relating to their business.

Mr Crombie believes the tax relief initiative also represents a significant opportunity for brokers, particularly when structuring the $20,000 business purchase through a lease or chattel mortgage.

“SMEs are continuously seeking alternate financing solutions,” he says.

“Financing business goods through asset finance alleviates cash flow, whilst still enabling the benefit of the tax deduction.

“The acquisition through a leasing structure is a smart alternative that allows the reallocation of funds to other areas of the business that can have a positive effect on efficiencies, productivity, sales and ultimately growth.”

Mr Crombie says asset finance is a natural extension of the home loan process, enhancing client relationships, increasing broker revenue and providing a competitive advantage in a highly aggressive market.

“Consumers are increasingly savvy and are favouring financing structures, such as novated leasing that enables upfront use of an asset without the risk or pressure of a sizeable upfront payment,” he explains.

“This model also enables the redirection of cash flow into other areas.

“We encourage brokers to simply ask their client about their current assets and financial goals to determine if they’ll benefit from asset financing.”

Stratton Finance is another company that recognises the opportunity asset finance presents to mortgage brokers. John Alvarez, the head of commercial and third-party, says there is always a demand for good brokers to deliver asset finance.

“Those brokers with a needs-based approach to selling and a passion to exceed customer expectations are the ones who tend to buck trends and downturns,” he tells The Adviser.

“With a clear business plan, a focus on fulfilling customer needs and cutting-edge technology, we have been able to excel, delivering strong year-on-year growth.”

Mr Alvarez says the formula for succeeding in asset finance is not too different to succeeding in residential broking – it comes down to mindset, a robust business plan as well as a hunger and humility to learn.

“Whether you work with small businesses or mums and dads, every broker should walk a day in the customers’ shoes,” he says.

“Opportunities are everywhere. However, the first step is to get to know your customer and build enough trust and rapport with them to encourage them to see you as their trusted adviser for all things finance.”

According to Mr Alvarez, Stratton Finance’s franchise program allows residential brokers to get acquainted very quickly with asset finance.

“In addition to our lender relationships, our systems, credit licensing, marketing, legal and compliance support are all ready to go, so they can focus on building their asset finance business,” he explains.

“It’s an amazing experience to attend Stratton’s franchise conferences and hear of the outstanding success stories from brokers who have diversified, and in turn, who have turned to asset finance as a full-time focus.”

One residential broker who has become an asset finance veteran is Michael Zaitony, director of Sydney brokerage Discover Mortgage & Leasing.

Having offered asset finance for the past 18 years, and with this sector now accounting for roughly 20 per cent of his entire loan portfolio, Mr Zaitony believes asset lending is more three-dimensional than home loans.

“The age of the goods, price and risk rating of the client all play a factor in their placement and eligibility,” he says.

“I enjoy watching my clientele’s asset position grow over time. I get to chat to our clients’ accountants to sort the most tax-effective package, so you tend to meet new people as well.

“I also enjoy the speed of the transactions. You are put on the spot for a lot of the matters, and that’s when you rely on your lenders for their speed and responses.”

Mr Zaitony says there are a lot of lenders competing in the asset finance industry that tend to vary over a wide spectrum of needs and products.

“You have your mainstream lenders which are offshoots of the big four and similar, and then you have specialist lenders who offer low-doc or credit-impaired products,” he says.

“It will always be competitive when there are numerous players in the game, but the range of needs for the client is also quite good. It covers a lot of what most clients would require.”

Done deals

Not every deal is the same when it comes to asset finance. The amounts of the loans vary, the vehicles and goods vary, as does the step-by-step process, especially if there is a scenario where the client has difficulty obtaining the finance.

Mr Zaitony recalls one recent example of a client who was looking to upgrade his vehicle which he uses for work under a car allowance basis.

“We met the client, took down an application and from there we got a pretty good indication on the lender, term and product he would need,” Mr Zaitony explains.

“That particular one had good previous credit, was a property owner, on a sufficient full-time wage and was buying a new vehicle.

“We went through some options in regards to term, monthly payments and structure. We called his accountant to confirm the tax effectiveness of our recommendation and the client then instructed us to proceed.”

After signing the privacy forms and gaining authority to act, Mr Zaitony selected a bank lender over a 60-month term on a chattel mortgage with no residual, as the payment suited his client’s cash flow.

“It was lodged and approved within 24 hours and we had documents for him to sign the next day,” he says.

“We kept the car dealer in the loop while this was happening and then settled the deal on the third day. We sent an email confirmation of the settlement of the deal to the car dealer and the client went to pick up his new car.”

On the other end of the spectrum, Mr Zaitony recently serviced a client who works in the demolition and excavation business and wished to add another truck and trailer to his fleet of 14.

“Being a current client, we were familiar with his file and we knew his accountant quite well. So we prepared a submission quickly from the data we had and then updated some details over the phone,” he recalls.

Discover Mortgage & Leasing reviewed the different terms and structures, ensured the client would claim his GST on the purchase in one hit (in the next quarter), and packaged the submission with his current financials after consulting with his accountant.

“We then consulted with our client to make sure he understood everything and awaited written instruction to proceed,” Mr Zaitony says. “All done on the day.”

The vehicle was not registered or ready to be picked up, as the client was to add some extras, according to Mr Zaitony.

“We had the deal approved unconditionally within the first 24 hours and held off on the signing of docs until the vehicle was ready to be picked up,” he says.
“We then settled the deal and the client picked up the vehicle and put it straight to work.”

However, it’s not just small businesses that can benefit from asset finance. Here’s an example of where asset finance has helped a mortgage customer upgrade their car and start planning home renovations, courtesy of NLG Leasing:

A broker recently completed a $510,000 home purchase (first mortgage) for a long-term client. Following settlement, the family reviewed all financial assets, including their car. This revealed an interest in upgrading to a 2015 Subaru Liberty, though they were also hoping to make some renovations to their new house.

  • Loan amount: $45,000
  • Loan type: secured car loan
  • Monthly repayment amount: $650
  • Turnaround time: approved and settled in three business days
  • Loan term: seven years
  • Location: Edwardstown, South Australia
  • Outcome: by structuring the car purchase through a lease, the family was able to immediately benefit from the new Subaru and start planning for renovations with the cash conserved. It provided a much more competitive and financially sound alternative to adding the car to the mortgage, without the pressure of paying for the car upfront.

 

WHY I OFFER ASSET FINANCE

Club Financial Services director Kerry Cleanthous shares his story of how offering asset and equipment finance has evolved his business

At Club Financial Services, we are a small finance brokerage of three brokers settling home loan volumes of around $100 million per year and have been trading for six years, based in North Adelaide.

We have always offered asset and equipment finance to our clients on a very ad-doc basis, maybe settling five to 10 transactions a year, predominately for car finance.

As time went on, we saw a growing demand from our existing clients for an alternative to car-dealer finance options and we made the conscious decision to offer asset and equipment finance as a normal part of our service proposition to all of our clients – not just those that sought out a solution from us. We became more proactive and less reactive to what we saw as a growing need in our client base.

In recent times, over the last 12 months, we have focused more and more heavily on asset and equipment finance and it has proven to be an excellent source of increased revenue, having partnered with Mildura Finance through their eChoice connection.

We are now looking at settling around five to 10 transactions a month, and we have seen a commensurate increase in our profitability accordingly, with a view to increase this to 15 to 20 per month in the coming year through a more streamlined process and some interesting marketing campaigns.

The process and support that Mildura Finance provide us as introducers is fantastic and allows us to deliver exceptional pricing to our clients, with an entire suite of lenders and various product offerings via the one channel. They can manage a reasonable volume for us and take care of the fiddly settlement process on our behalf.

Our clients love the fact that they can rely on us to coordinate their asset and equipment finance. We already have a great understanding of their circumstances and its saves them having to rehash their entire life story to another party.

It has also opened the door to opportunities with younger clients, being the children of our existing clients. We can then deliver a great client experience to a whole new generation of borrowers, who will ultimately become our next wave of home loan clients. Having positively experienced our service for their car finance, we have no doubt that they will look to us for assistance with their property finance.

I think that in an ever-increasingly competitive marketplace, being able to offer a more diverse but very related offering can only hold us in great stead for the years ahead and helps future-proof our business. We’ve financed a great number of cars, but also more obscure items such as speed boats, charter boats, commercial baking ovens, skip bins and rubbish trucks, crash-repair equipment and gym equipment. The expertise that our partners at Mildura Finance provide is integral to being able to manage the application process for such a vast array of assets and equipment.

Most brokers we’ve spoken to about asset and equipment finance think that it is too complicated, too hard or too onerous. From experience, we can say as long as you have a provider that understands your business model, that can’t be further from the truth.

First steps in looking to get into asset and equipment finance would be to contact someone like Mildura Finance and get a better understanding of the options that exist for you and your clients, and the process that you’ll go through from client introduction, approval, sign-up and settlements. It is always a good idea to be fully informed about the process you are going to guide your clients through.

From there, the rest is quite easy. Just don’t be scared from offering asset and equipment finance as a normal part of your service proposition. Clients need an alternative solution and who better to deliver that solution than the person they already have a great rapport with like their existing finance broker?

 

THE DOS AND DON'TS OF ASSET FINANCE

Damien Warren, director of Adelaide-based brokerage Mortgage & Lease, gives his top tips on what to do and what not to do for brokers diversifying into asset finance

Do:

  • Find a good mentor when you’re first starting out.
  • Ask questions if you’re not sure. Most BDMs are approachable and come back to you quickly on the loan structure or scenarios, and other brokers who are more experienced in leasing are always good for a sounding board as well. I’m always happy to discuss a scenario with a colleague if it helps them out.
  • Outsource on more complex deals if you’re not confident in the transaction. You keep ownership of the client and are still able to earn an income from the deal.
  • Get accredited through an aggregator that has your best interests at heart and specialises in leasing aggregation (there are ones out there – I use one myself and it is separate to my mortgage aggregator).
  • Make sure you get the best income structure and delivery rate that you can – you win more deals and make more money.
  • Enjoy it.

Don’t:

  • Give up after one transaction if it doesn’t go through smoothly (Murphy’s Law – it won’t).
  • Expect it to be easy and happen overnight. The key is repeat clients, and unlike mortgages, vehicle finance in particular averages about two-and-a-half years before it’s paid out or the client upgrades. Be there when they do their next one. SMEs generally have multiple asset finance contracts going at any one time, and this provides multiple opportunities.
  • Cut corners, disregard AML or NCCP legislation (enough said).
  • Send in a one-page application (or minimal notes) and expect the assessment officer to understand your client. Give them enough information to get that approval.
  • Be greedy with your commissions. Make an earning where you can, but expect the supplier and the client’s own bank to be competition (especially car dealers).
  • Forget to educate your client on time frames. Try to under-promise and over-deliver.
  • Be afraid of asset finance. Inevitably, one transaction will go wrong at some time (usually your first). It happens to best of us. Use it and learn from it!
The assets of asset finance
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