Non-banks are often considered the best partners to SME clients. The Adviser looks a little more deeply into the commercial and short-term lending genres and finds out from the market leaders why they are best placed to help brokers with these specialist forms of SME finance
Here are the numbers: Australia plays host to nearly three million SMEs at the most recent count, and that number is growing. The upshot of this is that an overwhelmingly large proportion of Australian companies are small to medium sized, and, together, they employ nearly half of the workforce.
With stats like that brokers would do well do consider adding both a commercial finance arrow and a short-term lending arrow to their quivers. That is, of course, if they haven’t already done so.
Mortgage Ezy CEO Peter James says non-banks make better partners to SME clients because they understand them better than the majors do. “Mortgage Ezy for example,” he says, “is built from an entrepreneurial spirit that also drives many SMEs.”
This is in stark contrast to the banks who have been salaried employees their whole lives. “Our philosophy is to understand and support the Aussie battler and give the little-guy a fair go,” says Mr James, adding that Mortgage Ezy can provide funding on a first mortgage security for all borrower classes, be it owner occupier or investment.
“At Mortgage Ezy our LVRs and rates are exactly the same, regardless of the state you live in or if you’re an owner occupier or investor.
“We seek to provide a level playing field for self-employed and employed borrowers alike,” says Mr James.
At Australian First Mortgage (AFM), in the SME space the focus is on commercial property, in particular the niche of the lower-valued commercial deal, up to $2 million.
“The majority of bank lenders don’t offer discounted funding in this sector of the market,” says managing director David White, “but our products offer very competitive rates and fees in this space.”
Mr White says the focus at AFM is to provide finance from $100,000 upwards for the purchase of factories, offices, and retail property and refinance of non-specialised commercial and improved industrial real estate.
On offer is a variety of both variable and fixed interest rates, at varying loan terms, through a selection of funders in all of the full-doc, low-doc and lease-doc space.
Liberty Financial has significant expertise in the commercial lending space including bridging finance secured by both residential and commercial properties.
“We lend on various property types from general commercial property to specialised securities and also within SMSFs,” says national sales manager John Mohnacheff.
He says that what Liberty brings to the table is the ability to write very small to very big loans. This is complemented by personalised assistance from dedicated BDMs and direct access to the credit assessors.
What most people don’t realise about the non-bank sector is that it has a wealth of business knowledge and it understands how business works, according to Cathy Dimarchos general manager at Sintex.
“Most of us are ex-bankers,” she adds, “and we don’t lend based on a computer telling us if something is approved, or meets guidelines.”
Which is just as well, she says, because SMEs don’t usually “fit the box”.
“You need to be able to work through the client’s needs and understand the business, its financials and business model.
“We take the time and put in the effort to really look at what is happening within that business,” she says.
Non-banks are a great avenue for SMEs to set up their finance requirements.
Ms Dimarchos makes the point that all of the commercial facilities cannot always be offered by one lender, but there is certainly much more available in the non-bank sector than what is perceived.
Having funded Australian business for the past 12 years – before, during and post-GFC – DJ Capital provides bridging finance to enable individuals and businesses to maintain liquidity and meet commitments while waiting for an inflow of cash.
“We have an excellent understanding of our broker partners’ requirements and their clients time pressure needs,” says CEO Damien Simonfi.
A prudent lender understands the ramifications of delayed settlements and therefore must deliver on time every time, he says.
“Our quick approval and funding times can provide borrowers with urgently needed funds quickly,” says Mr Simonfi. He adds that the “three Cs” of lending are always applied.
“Character of the borrower, collateral that we are lending against and the capacity to repay the debt should be the foundation stones for any prudent lender. In our sector the critical element is to ensure the client’s safe exit is on track and that we are assisting in our capacity during the term of the loan,” says Mr Simonfi.
In addition, he makes the point that given the importance of SMEs in the economy, lending to SMEs should take a more important place in the sector’s lending portfolio.
SMEs, he says, by virtue of the number of businesses in Australia are the engine room of our economy.
“Consistently we are witnessing the challenges that SMEs face with cash-flow requirements. Often they have been rejected by mainstream lending, non- conforming lenders and debtor-factoring finance,” he says.
An SME’s major focus is understandably the running and driving of their business, says Andrew Littleford, managing director at Interim Finance. They are often under-resourced and certainly time poor, he adds, so a likely casualty of this profile will be their up-to-date reporting and financial compliance – the exact key items necessary to achieve success with the major banks for their funding requirements.
“Non-banks can apply the flexibility to their assessment criteria that major banks simply cannot. If the story makes sense and a plausible exit strategy exists, and the borrower has the opportunity to obtain independent financial and legal advice, their prospects of obtaining their loan will be greatly enhanced,” Mr Littleford adds.
Lenders like Interim Finance, he says, who understand and specialise in the provision of funding for SMEs often have a high level of autonomy that allows for fast turnarounds and settlements “in a fraction” of the time normally expected.
Semper Capital is a market leader in short-term property lending and offers competitive rates for risk in the non-bank sector. Essentially Semper Capital provides non-bank funding from $50,000 upwards but specialises in the $1.5 to $10 million space.
It is not APRA-regulated so its appetite for loans is not affected by APRA risk-weighted ratios in the way they are with the banks.
“We lend in the areas the banks have less of an appetite to lend in,” says CEO Andrew Way.
Typically this is non-metro areas for residential, industrial and commercial properties.
Banks, he says, don’t serve the regional area particularly well. The thing the bank can’t do is move quickly, preferring a high-volume, low-margin model. On the other hand Semper employs a bespoke approach where credit risk is analysed on an individual basis by an expert credit manager.
“Semper Capital takes a purely rate-for-risk approach,” says Mr Way, adding that it is this that sets it apart from other banks and non-bank lenders.
He says the Semper Capital business model can be summarised by the acronym DUO. Development and deleverage loans, to sell down assets back to levels of serviceability.
Typically, a client who has been with a bank for 25 years with various loans – all of which are cross-collateralised and require unbundling – will need funding straight away.
“Now [that] they need immediate funding,” says Mr Way, “we help them with immediate bank takeout and an increase in borrowings, and, through a broker, refinance to a number of funders at the most suitable rates and terms.”
And opportunity loans for a client with assets that requires a loan quickly. But the difference with Semper Capital, adds Mr Way, is that it adds an extra test – the proof of benefit test.
“If there is no proof of benefit in doing the loan for the borrower, then we won’t approve the deal,” he says, adding that a successful lend for Semper Capital is when the customer exits the loan.
“We want them to get out of the account altogether,” he says.