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Self-employed - The allure of the entrepreneur

by Staff Reporter17 minute read
The Adviser

Self-employed borrowers are one of the most lucrative market segments a broker can target and the indications are that funding is at last beginning to open up

Not only are Australia's self-staters generally more receptive to receiving counsel from other professional advisers, such as accountants and lawyers, they are also more likely than other borrowers to struggle securing finance at their local bank branch.

It's a match made in heaven for the broker.

According to Australian Bureau of Statistics (ABS) around one in 10 working Australians are their own boss. In 2009, there were approximately 944,000 self employed Australians - and that number is growing.


The term ‘self-employed' is broad and can encompass everything from tradesmen and seasonal workers to owner operators and small business owners, but they all share some common similarities.


Securing finance as a self-employed borrower is a bigger challenge in many instances than it is for employees. In a world where the banks are particularly risk averse and funding availability remains thin, customers that don't have the full suite of documents due to their circumstances are often overlooked.

That's not to say that banks won't lend to self-employed borrowers, it simply means that there is a higher level of rejection than there perhaps was three or four years ago.

Tougher market conditions for the self-employed create a strong case for broker-based solutions, and some in the industry are increasingly capitalising on the lucrative opportunities that present themselves.

With more than 15 per cent of his business originating from the self-employed sector, Aussie franchisee Ross Le Quesne knows firsthand how lucrative the self-employed market can be.

Mr Le Quesne has found that self-employed borrowers are not only loyal clients - they are also more likely to need a broader range of products above and beyond just a home loan.

This could range from insurance based products and personal loans to commercial finance and business loans.

"It takes courage to start up a business on your own, and so this means that self-employed borrowers are generally a little more entrepreneurial and open to what's on the market," he says.

But there are more benefits to cracking the self-employed sector than product diversity alone.

As with any niche market the opportunity for referrals is particularly attractive amongst the self-employed. Most business owners and sole traders have a network of friends and associates who are in the same position and word of a good broker can quickly spread.

"Positive referrals and word of mouth is the biggest generator of business for any broker in any market segment - and it's the same for self-employed borrowers," he says.

Mr Le Quesne says the most important thing a broker can do is to build a solid understanding of their product offering for self-employed borrowers.

Sound product knowledge is crucial to any broker's business. However, as self-employed borrowers are often restricted in the products they can obtain, it is important for brokers to be abreast of the various options on the market.


But how can brokers effectively break into the self-employed sector and what are the hard and fast benefits of selling to these clients?

The first place to start when it comes to tapping into the self-employed market is in building the right referral networks.

Elite Business Writer and Southshore Finance director Mike Coombes generates a significant share of his business in servicing business owners and self-employed clients. He has found that solid referral partnerships with accountants and financial planners are the best way for brokers to attract self-employed borrowers.

"The majority of my referred customers are self-employed and that is because these referred clients are either coming from accountants, financial planners, insurance specialists or other self-employed borrowers," Mr Coombes says.

With a referral network in place, brokers who deliver on their promises and who service their clients well will soon see a strong flow of referred business from their client base.

"Ultimately self-employed borrowers are the best referral source. If you provide quality customer service, they will more than likely refer you on to friends and family - who are often self-employed borrowers as well."

Mr Coombes says self-employed borrowers account for almost 80 per cent of his business. He focuses on this borrower segment because they are lucrative clients that understand the value of professional advice.


In addition, he says self-employed borrowers provide brokers with extensive repeat business opportunities.

"In my experience, I have found that once I successfully organise a loan for a self-employed borrower - either residential or business - they trust me with their repeat business," he says.

Because they tend to be entrepreneurial, self-employed are also more likely to look at their finances on a more regular basis than other borrower segments.

Whether during a time of growth and expansion, downsizing and consolidation, or simply meeting on-going business expenses, self-employed borrowers can have a broad range of financial needs that a broker is perfectly positioned to fulfil.

"Provided you offer the best customer service possible, self-employed borrowers will give you a lot of repeat business," Pink Finance director Nicole Cannon says.

"In fact, depending on their business model, they may need your assistance every single month - or at least a couple of times a year."

And Ms Cannon is not alone in highlighting the strong business prospects offered by the self-employed. Smartmove director David Brell has found his self-employed clients to be fiercely loyal - some of which have been with him for over 16 years.

"My clients know that I know everything about their business, so that brings them back to me time and time again. It is easier for them to continue to use the same person each time then explain their financial structure to a new bank manager."


But it is not just the loyalty of the self-employed borrower that makes them an attractive prospect.

According to Ms Cannon, a self-employed borrowers' needs stretch well beyond home loans - providing brokers with the opportunity to build their bottom line by cross selling other products including insurance, equipment leasing and business loans to this client.

"All self-employed borrowers will, at the very least, need mortgage protection insurance," Ms Cannon says.

"And, as they are, mostly, savvy business operators, they understand the value of having such protection - so it is not a hard sell."

Provided a broker has the abilities to cross sell other products to their clients, self-employed borrowers stand to be very lucrative.

More importantly, they will also be incredibly sticky and thus are more likely to use you and your services on an ongoing basis.

According to Mr Brell, brokers that are looking to target the self-employed sector must have two things: firstly, good customer service and secondly, the ability to understand and read financials.

"A lot of brokers shy away from the self-employed sector because they think the loans will require too much work and are simply too hard. However, this is simply not the case," he says.

While there is slightly more paperwork involved when dealing with a self-employed borrower, the actual loan process is no different to that of a PAYG borrower.

"The extra work is far outweighed by the reward," he says.


The traditional flagship home loan product for the self-employed borrower is the low doc.

This type of loan was initially pioneered by the non-bank sector back in the 90s and was targeted at businesses that could afford to service a loan.

In the early days self-employed borrowers would be looking at a 60 per cent LVR and could expect to pay a couple of per cent over the standard variable rate for the privilege of not providing the full set of documents the banks expected.

The low doc however came of age in the last decade when lenders like RAMS Home Loans brought in a new level of competition in lending.

Maximum LVRs quickly rose to 80 per cent and then kept going, with some lenders offering low docs as high a 95 per cent. And it wasn't just the maximum loan ratios that loosened up.

The cost of low docs tumbled at the height of the securitisation boom. Debt was cheap, and low docs were in high demand.

By the mid 2000s pricing was close to parity with the variable rates the banks were offering for full doc borrowers.

Inevitably, as low doc lending became so competitive it was abused and it ended up catering for a far broader audience than the self-employed sector it was intended for.

FirstPoint NB director Troy Phillips says low doc mortgages were never meant to allow borrowers that held an ABN, or could demonstrate serviceability, the option to self-certify income and borrow huge amounts.

"Low docs were never meant to appeal to fraudsters and tax cheats; it was a legitimate option for people with complex structures to fund a residential mortgage in a reasonable expected time frame without having to go to a private banker," Mr Phillips says.

"But ‘blow in' brokers ultimately abused the product, and lenders with no credit skill used capital markets to reduce margin and credit appetite to the point of pain in this segment."

Inevitably the party came to a crashing end when the American housing market imploded. Millions of loans and billions of dollars disintegrated, leaving every financial institution the world over with little appetite - or capacity - to accommodate low doc lending.

The big four tightened their lending criteria to this market segment, making it harder for self-employed borrowers to obtain finance.

In 2009, Westpac, St George and RAMS all tightened their lending policies for self employed borrowers - requiring each low doc application to be supported by at least one year's worth of business activity statements, with the most recent statement no more than three months old at the date of application.

Self-employed borrowers suffered as a result of these changes.

Genworth recorded a significant decline in the number of low docs written. In 2009, this market segment accounted for 12 to 15 per cent of the insurer's business - a significant drop on the year before.

But while the last few years have been tough for self-employed borrowers and the brokers who service them, the outlook has brightened.


While the major lenders continue to enforce their tighter lending requirements, there are indications that funding for this sector is starting to open up.

Earlier this month, two wholesale funders - Adelaide Bank and Advantedge - gave a much needed boost to the self employed sector, with the launch of two new low doc products.

The funding boost has helped non-bank lenders step back up to the plate and once again target the niche market they dominated 10 years ago.

Pepper announced earlier this month it would slash 0.5 per cent off its Self Employed Advantage Rate, while Australian First Mortgage launched a Complete Option self-employed lite doc loan.

AFM's national director of sales and marketing Iain Forbes says while funding for the self-employed segment is remains tight, is has eased slightly since this time last year.

Mr Forbes says many of the non-banks are beginning to reintroduce competitive low doc products that are specifically targeted at the self-employed market.

"While funding is still tight, especially amongst the majors, the reality is that there is still a lot of demand for self-employed products. And now, as funding begins to open slightly, lenders are stepping back up to the plate to help brokers find their clients the right product," he says.

Better Mortgage Management's Murray Cowan agrees that relaxed funding ultimately means more opportunity for brokers.

He says the self-employed market is, and always has been, a big market for both lenders and mortgage brokers.

"From a lender's perspective, the self-employed are very good borrowers because they generally have a strong income and asset position. Lending to this market is relatively safe as their arrears levels are usually on par with full doc borrowers."