Small business owners, as The Adviser reveals, can become potentially very lucrative clients for brokers
AUSTRALIA’S SMALL- to medium-sized enterprise (SME) market is seeing substantial growth. There are 2.1 million SMEs nationwide, and in June 2009, SMEs made up 99 per cent of the domestic business market (federal government statistics).
When the banks began to tighten their lending policies, SMEs looked to brokers for help meeting their borrowing needs – and they are doing so in increasing numbers.
The SME market encompasses debtor finance, equipment leasing, vehicle and several other types of loans. Brokers therefore need to be flexible and able to handle a range of borrowing requirements if they are to be truly successful in the SME market.
Just as the banks have passed over SME borrowers’ needs, so brokers have been presented with an opportunity.
Finlease’s Alex Charilaou, for example, says 95 per cent of the SME clients he encounters are disgruntled with their banks.
“Some have been turned away, in situations where they’ve been with that bank for 30 years, because policies have tightened up,” Mr Charilaou says.
“A client does not feel loyalty from their bank when things get tough and they’re fearful of their own business being restricted so they start to look elsewhere.”
THE BIG TIME GAIN
Radius Finance’s Adam Ingham says SMEs offer brokers the opportunity to position themselves in a place of influence. They can, he says, create a very intimate connection, not only with the business owner but also with other staff.
“When introduced to a commercial client the business will typically involve several or more other people that the broker then has immediate access to,” says Mr Ingham, emphasising that this can be very effective in winning new clients. “It’s like getting multiple bites of the same cherry.”
Leveraging that access is the key to making the most of the SME market.
Liberty Financial’s John Mohnacheff says it’s a win-win situation.
“It’s another string to the bow when a broker has an additional revenue stream,” he says. “In turn, it gives the borrower confidence that the person they’re dealing with understands not only their consumer requirements but their business requirements.”
Working with SMEs, adds Mark O’Donoghue of Finlease, allows brokers to stay closer to their clients since their service needs are more frequent.
“People usually only change houses every five years, so that’s a significant period of time to their next action point when they’re going to engage you,” Mr O’Donoghue says. “So, if you’re working in additional spaces, you’re going to stay closer to your clients in a more relevant manner.”
IDENTIFYING SME CLIENTS
SME borrowers comprise such a huge proportion of the market that a broker should not be too hard pressed to find a potential client.
Even the initial couple of meetings, when clients are asked about their employment, can flag a possible client, according to Mr Mohnacheff.
“The moment you see that they’re self-employed, you know you’re onto a good thing,” he says. “You can then keep them on the list as someone who you begin to offer specific SME products to.”
Mr Charilaou believes brokers should also hunt through their current database for opportunities with existing SME clients.
“Look at the financials on their books that would show the depreciation schedule and what assets they own,” he says. “You can then work on those SMEs that have an aging fleet of vehicles and, from there, open the conversation up to talking about finance in general.”
Consistent communication is vital, Mr O’Donoghue adds, and if brokers don’t continually remind their clients about the range of products they offer then those offerings can easily be forgotten.
“The fact that you mention something to a client in an email doesn’t for one moment mean that client remembers it in six months’ time when they actually want finance for a vehicle,” he says.
And Mr Mohnacheff agrees: “Every time you talk to a customer, you have an opportunity to remind them about a car loan,” he says. “What happens is they often say, ‘I’m glad you told me that because my daughter or son needs help with that at the moment’.”
Servicing SME clients who have a range of financial needs doesn’t have to be daunting. Several non-residential loan products are as straightforward to write as residential vanilla loans and many can be settled extremely quickly.
Basic motor vehicle products are an excellent starting point.
“Many of the aggregators a broker works with will have easy access to lenders for this type of loan,” Mr O’Donoghue says. “Plus, a number of aggregators have portals to their sites so brokers can facilitate motor vehicle finance and smaller equipment finance loans.”
When it comes to equipment finance, brokers should remember that applications are processed by a financier so it’s most important they are put together to get the attention of a person, not a computer.
“A submission needs to read exceptionally well,” Mr O’Donoghue says. “It needs to not only show the strengths but the weaknesses – and the mitigating factors to remove or override those weaknesses.”
When a financier has finished reading a submission, they need to feel thoroughly confident that they can approve it. Lack of important information –whether positive or negative – will sow the seeds of doubt in the financier’s mind.
Debtor financing is another area into which brokers who want to develop an SME client base could easily move.
According to the Institute for Factors and Discounters, a small but fast growing number of small businesses are turning to this type of finance. The March quarter of 2012 saw the second highest factoring turnover figures on record, with $1.26 billion representing a 31.4 per cent increase on the March 2011 quarter.
Bibby Financial Services’ Greg Charlwood says debtor financing requires no formal accreditation and offers an instant cash injection.
“Upfront commissions are paid to brokers on the client’s initial drawings and trailing commissions are offered for the life of the deal,” Mr Charlwood says. “This enables brokers to keep servicing their debtor finance clients and deepen their ongoing relationships.”
Cashflow Finance’s Andrew Boele van Hensbroek agrees, adding that debtor financing is a simple and fast process that can successfully be added to a broker’s offering.
“Once we have a copy of the debtors ledger, an answer can be given within half an hour to let the client know if they’re suitable or not,” he says.
The advantage of ‘disclosed debtor finance’ for most lenders, he adds, is that they can provide funds to an SME client without any form of property, viewing the loan instead as an overdraft facility without the security.
REFINANCING BUSINESS LOANS
Another avenue down which a broker could travel to build an SME client base is refinancing business loans – a relatively easy area, according to Adam Ingham of Radius Finance.
“In most cases, the SME commercial client will have the family home supporting one or two business loans – typically a small overdraft and a term loan,” Mr Ingham says. “As business loan rates can be nearly double those of residential ones, it can save clients several thousands in annual costs.
“Brokers dealing in this space for the first time should not minimise the importance of aligning themselves with a great support network to help build their confidence.” Having tight relationships with other professionals is crucial to success, according to Mr Ingham.
While many brokers consider commercial lending and SME structures to be just too hard, Mark Woolnough, head of broker distribution at ING DIRECT, says some commercial products could be considered fairly basic.
Mr Woolnough believes ING DIRECT’s own ‘set and forget’ commercial facility is a good product with which brokers can ease themselves into the commercial space.
With this product, there are no annual reviews for loans under $2 million that perform well which removes the burden – both for brokers and customers – of having to provide extra documentation regularly.
According to Mark O’Donoghue, SMEs aim to outsource most of their financial tasks – and lending is one of them. Small business owners face intense demands on their time, and so having a professional do an outstanding job in a specialist area for them will virtually guarantee that professional gets some repeat business.
“When you engage with an SME owner you have an opportunity to get a really sticky relationship if you always do the right thing by them and leave them pleasantly surprised every time you do a transaction for them,” Mr O’Donoghue says.
“Because an SME loan is not simply two payslips and a PAYG summary, the client is grateful that a broker has relieved them of this ‘paper warfare’.
“The banks are simply not servicing their clients in this area, so an SME business will benefit from a broker with a high level of skill who can provide a relationship-based service and independent advice,” Mr Ingham adds.
Mr Woolnough believes one of the greatest long-term advantages of servicing SMEs is the active referral network that comes with them.
“SME customers run businesses – often with other SME customers – as well as interacting with SME business partners,” he says. “All this means a great opportunity for active SME referrals if the customer has a great experience with the broker and the lender.”
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