One of the most common areas that mortgage brokers look to diversify into is asset finance. But for many, asset finance just means car loans. In the second instalment of the ‘Broking beyond home loans’ series, Annie Kane takes a deeper look into what asset finance involves and what home loan writers need to know before breaking into this area.
If you talk to a mortgage broker about asset finance, the first thing that usually springs to mind is car loans. It’s an easily accessible and lucrative business, says Bernie Campbell, CEO of asset finance at Pepper Finance Services Group: “We’re only in the second year of operation since we started our asset finance business from scratch, but in two years we’ve hired 130 people, we’ve invested heavily in systems, and lent over $1 billion dollars to 40,000 customers – all through a national network of dealers and brokers. Although we’re currently doing between $60 and $70 million a month, we’ll grow that to $100 million a month over the next couple of years. And we’ll do that because brokers will be doing more of this.”
According to Mr Campbell, the majority of the business Pepper Asset Finance writes is vehicle loans for consumers, which he says is a relatively easy market to tap into: “From a mortgage broker’s point of view, if you think every house they finance will have at least two cars in it, and they’re turning them over every three or four years, for their 1,000 customers that’s 600 opportunities a year (or 50 a month).
“But most importantly, if they aren’t doing it for their customers, someone else will. So, it’s not just an income stream, it’s also a defensive measure in terms of protecting their client. On the other side of the coin, today’s renters buying a car are tomorrow’s home buyers, so it is also an offensive strategy too – if you’re writing the car loans for a client then they would likely come back to you for a home loan.”
While car finance is a relatively easy process, and a pretty speedy one too (with approvals often happening within an hour and settlement happening within 24-hours), asset finance as a whole is a far more complex area.
Indeed, those looking to call themselves asset finance brokers should be sure of what they’re really offering, says David Gandolfo, president of the Commercial Asset Finance Brokers Association of Australia (CAFBA).
The asset finance broker and director of Quantum Business Finance elaborates: “There have been some stories suggesting asset finance is fairly straightforward, [that] you can do motor vehicle finance up to $100,000 and all you have to do is tick a few extra boxes. While that is true in some circumstances — motor vehicle finance is actually a fairly straightforward, low-doc kind of product — even if you can put in a motor vehicle application for $60,000 it doesn’t necessarily mean that you know how to structure the transaction correctly in terms of the term, the balloon, the life of the asset, the usage of the asset etc. All that means is that you know how to put in a car application, which any broker can do… That is not what makes them asset finance brokers.”
He adds: “In a way, I lament the fact that it actually dumbed down the industry. It makes it easier for people to get into a market that they are perhaps not experienced in.”
Mr Gandolfo emphasises that asset finance covers more than just car loans, and urges those looking to expand into equipment, machinery, infrastructure, and corporate lending to ensure they are properly trained and know the three product groupings (leasings, hire purchases and chattel mortgages) well.
“Our members can do plant machinery, equipment, infrastructure, they can import machinery in from overseas, they can organise lines of credit, they can do transactions in foreign currencies, they can do progress payments in different countries as well as here, they can do entire projects.
And all that requires some expertise,” he says. Greg Malone, an equipment finance specialist at G&H Financial, explains that unlike car and truck finance, equipment finance “isn’t just ticking the boxes, it’s not a two-day job. It can be a two-week or even two-month job”.
He explains: “The minute you start with tax debts and limited or no financials, it becomes harder to write. You might have to do different things, like break up the asset or try something new… I’ve done a deal for a Japanese restaurant before, and the bank said they couldn’t do it because it was outside of covenant, and I just didn’t really understand what that was. It’s a whole other area that you need to know.”
In fact, the broader asset finance market can cover almost anything – from agricultural equipment, cranes, office fixtures, computer equipment (both hardware and software and cloud-based computer peripherals), aircraft, and even mortician’s latex dolls and Hungry Jack’s signs.
Mr Gandolfo explains: “Just look all around you – chances are the things all around you have been financed under asset finance. Asset finance is everywhere. It’s the biggest and best industry that no one’s ever heard of.”
More brokers writing asset finance Figures from the Australian Equipment Lessors Association suggest that the overall asset finance market in Australia in the last full financial year was about $40 billion in new business. Of that, about 61 per cent was introduced by brokers.
Mr Gandolfo says that this is no mean feat, especially as brokers would have had very little of that market a decade ago.
He elaborates: “What it means is that the asset finance broker market has matured, and perhaps one of the reasons for that is that there are more and more means by which you can access asset finance. Our competitors are the banks, who are our funders, but we’re also seeing that there are more mortgage brokers moving into asset finance.
“I wish them well, but I’d like them to do it properly and not end up on A Current Affair and make the rest of us look bad.”
The CAFBA president suggests that mortgage brokers looking to take on asset finance outside of car finance “need to tune their thinking into what the asset is going to do for the business”.
“So, if your client buys a new piece of plant machinery, it’s either going to produce something new or do a process that was previously outsourced, it’s going to increase throughput capacity and complement whatever they have in their factory or‑business,” he says.
“You need to be able to write a brilliant submission about what the purpose of the asset is going to be and the positive impact it’s going to have on this business if you want to convey to a lender, who has never seen this asset before, its benefit. You need to be able to convince them as to… why it is the right solution in that business owner’s growth strategy. You need to be able to show, in the cases where an asset doesn’t necessarily tick all the boxes, that even if it doesn’t fit all the parameters, it still makes‑sense.”
According to Mr Gandolfo, one of his “major frustrations” is when customers go to banks to help with the purchase of a piece of equipment and the banker offers an extension on a home loan or overdraft.
He adds: “That’s something we want the mortgage broking market to avoid doing as well. If someone goes along to a mortgage broker who is not well versed in asset finance and wants money for a piece of equipment, quite possibly the broker will utilise the product that he understands well, and provide them with an extension of their mortgage. But it’s not necessarily going to be the right‑solution…
“If mortgage brokers are going to be doing asset finance, we would want them to do it‑properly.”
Pepper Asset Finance’s Mr Campbell agrees: “Small ticket asset finance under $100,000 is pretty straightforward… but once you get over that it starts to get a bit more complex for small business and then that becomes the preserve of the specialist equipment finance broker.
“But, I think there is much greater opportunity for mortgage brokers to do the consumer asset finance and cars for small business. They just need to educate themselves more…
“I think a lot of brokers don’t go into it because they think it’s either too small, or too much of a pain for them to do, or too hard. It’s not; if they educate themselves on it then they will find it’s a very lucrative and natural area for them to extend into.”
Mr Gandolfo agrees, concluding: “Finance is an enabler. Our business isn’t about lending money necessarily; it’s actually about creating jobs, growth, outcomes, equipping businesses with the assets and means by which they can grow, expand, employ and‑prosper.”
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