In this episode of In Focus, OnDeck Australia’s head of sales Michael Burke and SME Finance Group CEO Neil McKay join Annie Kane to talk everything business lending related, and the marketing channels they use “that drive origination”.
Tune in as they reveal the opportunities brokers can give SMEs, how speed and ease of transactions can help businesses succeed, the benefits of using Equifax’s credit scoring system, and their top tips for brokers looking to break into this space.
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Speaker: Welcome to The Adviser's In Focus Podcast with your host Annie Kane.
Annie: Hey everyone and thanks for tuning in to The Adviser's In Focus Podcast. I'm Annie Kane, editor of The Adviser and today we're talking about everything SME lending related. So joining me in the studio today is Neil McKay, director and CEO of SME Finance Group and Michael Burke sales at SME lender OnDeck. As we learn more about how brokers are finding the SME space, the types of clients they are finding finance for, and the lenders they are using. So first of Neil, if we just touch on your background. We're hearing more and more the SMEs are needing finance and I think it's something around 70% or 80% going to brokers for that finance. I just wondered if you can give us a bit of background to how you got into this space and how you're finding your clients.
Neil: Mm-hmm (affirmative). Sure. Annie, our business goes back to the late 70s ... The original founder. And it was a business that was essentially funding luxury assets for a long period of time. Around 2005 strategic decision was made to specialise and target the SME market specifically. And so it commenced in 2005 as a semi-finance group. The GFC got in the way a little ... To some of the progress of the business, but post-GFC and certainly since 2013, we have been setting the business up in specifically targeting small to medium size businesses. And how we've done that is really around increasing our product offering and diversifying the business and our aim is to really try and provide everything from a finance point of view that any SME business needs. We find that that approach is one that's unique and they don't get from a lot of other lending sources.
Annie: Mm-hmm (affirmative). And just getting back. So, you started off in luxury assets. Is that like yachts and helicopters?
Neil: Yeah. Luxury motor vehicles, which we still do a lot of today. But, yeah, they were luxury assets. Cars, boats, things like that. Yeah. We still do some of those but they're not the mainstream of the business these days.
Annie: Okay. Well if I ever need a yacht or a helicopter I know where to get it.
Annie: Just looking at the switch then to SME, obviously completely different. They're not going to be looking at having a yacht anytime soon probably. What was the actual trigger for moving into that space?
Neil: It really came from the opportunity that we saw from our current asset finance. Some of the non-luxury assets that we were doing. They were assets that were provided to small businesses. During those conversations with customers and while we're doing transactions, we were very, sort of, silo in our approach to ... We just provided asset finance. Talking to them, particularly hearing from them that their banks weren't providing what they needed as such, across the board. Whether it was for assets or other types of lending, and the types of security that they were being asked to put up, there was clearly a gap in the market or a significant opportunity in the market to try and provide diversified products that met their needs. And so that's where we saw the opportunity and took it off.
Annie: Okay so, I'm guessing at the beginning, all of your clients came your book already.
Neil: Yes, yes. A lot of them did. A lot of them did, and so for the initial period of time, particularly around 2013, 2014, we really did target our existing customer base and broadened and diversified and tried to get more of our product into each one of our customers as such. But today whilst we're still servicing those customers we are sourcing the market whether it's via social media and things like that to find new clients out there that are in the SME space
Annie: Okay, I'm going to come back to that. But first I just want to touch on what you're saying the about finding it difficult to have the banks fund these clients. So obviously I guess that's where the partnership with OnDeck comes on.
Annie: Comes into play.
Annie: How did you find out about OnDeck and how long have you been working together?
Neil: Yes certainly. There's been obviously the FinTech movement in the market of new lenders coming along, and there are a lot of them today. I was introduced to OnDeck obviously via Michael who I've got a long history with. We've worked together. The connection was there. We spoke about the product offering and how they were setting up the business in Australia. What I liked about it, I liked the type of lending they do, but what was appealing to me is the support, the backing they have, the business in the US. It's got history there and so that to me was something that we were looking for a long term relationship.
Annie: Mm-hmm. And so you were working together before you came to OnDeck, Michael, is that correct? So where were you working?
Michael: At GE.
Annie: Oh, okay. GE men.
Annie: Neil's just touched briefly there on about the history of OnDeck coming from America and setting up in Australia, is it 2015?
Annie: How have you found ... Firstly we can just go through why Australia from America and was it as Neil was saying that it was because of a lack of finance, or what was the reason for branching into the Australian market. And the secondly, what kind of flows you've been seeing coming through the broker channel in the last 12 months, lets say.
Michael: Yeah. So the business OnDeck started in the US in 2007 was publicly listed on the New York Stock Exchange in 2014, and I suppose at that point in time looking for growth opportunities and the Australian market was identified as a strong growing market that was quite similar to the US market so it was a very natural move to come into the Australian market. There was a group of individuals that had worked together with OnDeck, including Cameron Poolman, the current CEO, to launch the business in 2015. And the business funding towards the back end of 2015.
And the strategy was initially to establish a direct business. The reason for that was we really wanted to establish product and process and make sure that was very seamless and established. Obviously having a parent in the US, we needed to embed the product and process into the Australian, so the decision was made to really use it as a direct business to build that out initially. We knew the broking market was a large part of the Australian market, however I think you've already quoted that ... And there was an East Partners report some 12-18 months ago that spoke of 70% of transactions funded within that commercial space are facilitated through brokers. So we knew it was a big market and our plan and strategy was always to go within that market.
And to be honest it replicates the model in the US. Our business model in the US is we have a direct business, we have partner channel and we also have a broker channel. And we're replicating that in Australia, so our direct business as I say has been funding since 2015, back end of 2015. Our direct business, we're very fortunate to have an equity in MYOB who is also a channel provider within our business and in February this year we launched the broker strategy. Clearly the low-hanging fruit in that channel for us is leverage the relationships that I've certainly built up over the last 15 years. And Neil at SME Finance was a natural call out to really seek feedback what he was seeing in the market and how we could go about differentiating ourselves with our peers and competitors.
Annie: Yeah. Was there anything that you learned since coming into the broker channel that you maybe hadn't anticipated. Is there any sort of things that you thought, "Well actually, we never thought of that." And speaking to brokers had helped you?
Michael: It's interesting because our assumption was the Australian broking market would be very similar to the US broking market and it's quite different because I would say the US market is somewhat more mature. What I mean that is they've actually got broking houses that specialise in unsecured products, so that's all they offer. They specialise in that product. Whereas the Australian market, the product offering within most broking houses is generally quite diverse. Or historically they've specialised in equipment finance or mortgage finance, but what we're actually finding now, and specifically if we call out the mortgage finance market, we're actually a level of saturation within that market.
So players that have traditionally funded residential mortgages as a product standalone are now looking for opportunities whereby they need to diversify their product offering if they want to grow, because they're seeing more entrants come in to their space, and consequently they're finding it harder to grow just in that resi mortgage space so they need to provide greater product offering.
And what a lot of them have actually uncovered, and it's kind of to Neil's earlier point around leveraging your existing database, they started to do some deep diving within their databases. And what they actually found was a large percentage, 20 to 25 percent of their database was in fact small business owners. So they'd gone along and provided a resi mortgage to them to buy a house, but then when they actually started to dig a bit deeper they found that there was a greater opportunity to provide a far broader product offering.
Annie: Yeah. So it could be maybe car finance and then moving into equipment and then even finding out more about the business and [inaudible 00:09:01] I guess and things like that. So just touching on the types of products, Neil, I wonder if you can just tell us about what are the types of things you're writing finance for. Are there any weird and wonderful things that have come through your door?
Neil: All sorts of things. When people ask me about our business it is very diverse in the product offering and what we do actually fund. And that goes from solar panels on roofs. These days we run a ... Call them programmes. Really large programmes. They're all the way through to traditional assets, the luxury assets, but what we're seeing more of is the requirement from small business around cash flow lending, and so that is becoming very, very much a requirement of small business for a whole range of reasons. And that's how we really thought that we should be in the business cash flow lending space and obviously partnering with people like OnDeck because the inquiry was certainly there from customers and they weren't being serviced by their banks.
Annie: By banks, yeah.
Neil: And most of the time, and you'll see, the banks will say, "Oh we've small business lending and so forth." But there's the little clause at the bottom that says you must have a property to secure it and that doesn't work for a lot of ... And what was a real eye-opener for me one day was being an electrical contractor who was a customer of ours. We'd financed some vehicles for them, and having an in-depth conversation about their business and they were actually running the business on a $100,000 credit card limit basically and they were using credit cards. And that was what their bank had offered them.
And I sat there and couldn't believe it. I had further discussions and they'd been trying to engage with the bank on business loans and things like that and the bank wouldn't participate. Wouldn't provide them for them. And they were using a credit card. And so we immediately took that transaction, went to a cash flow lender and basically restructured their financing into a much, obviously, a better pricing for them as such, and a much better facility. So, saw those opportunities. To answer your question, we see all sorts of diverse equipment and things that we are asked to finance and we've got the capability to basically do them all.
Annie: Mm-hmm… I think a really interesting one about cash flow, especially with SMEs where they might have ... For example, the common thing that we hear is they're saying, "You know we've got like 30 day invoices, but half the time it's months behind schedule. We don't see anything come in and we're paying everything out." But there's this huge gap in between before the money comes back in again. Cash flow is obviously a big thing and then even just small things like paying your staff and when you're waiting for an invoice to be paid.
Neil: Yeah. And some of those cash flow challenges can be short term, right. And then some of them can be a little unpredictable in that debt may fall over, or they may have some issues like that. And what's great about some of the facilities and, you know, once again what OnDeck offer is the opportunity for them to take a short term cash flow loan to get themselves through those tough periods and generally most cases pay it out with little penalty and so forth when the time's right, and they progress on with their business. In the past they would have been at the bank and waiting for six to eight weeks for somebody to provide them with a response on their application.
Annie: So we've touched on ten around times there. Michael I wonder if you can just tell us a little bit about the sort of loans that you provide for example in cash flow lending. Don't worry about that. And then also what your turn around times are looking like. Are they six to eight weeks?
Michael: Sure. They're not six to eight weeks.
Annie: I thought you were saying, "Sure, they are." I was like, okay.
Michael: No, sure. Happy to answer the question. Our products specifically, it's an unsecured product, our dollar advance amount varies from $10,000 up to a $150,000. Our terms are six out to 24 months, and I think where OnDeck's quite different from a lot of our peers within this space is that when we underwrite transactions we make a business assessment health check based on only looking at three months worth of bank statements. We've got the benefit of a parent that's lent $7,000,000,000 in this space and I'm happy to say they've just gone over the $7,000,000,000 mark. Most of their marketing materials historically said six but we've had significant growth in the business. So we've got the advantage of having funded a lot in this, so we have a lot of data points that allow us to make informed decisions around the credit health of businesses.
It's interesting, I hear Neil talk about a lot of the reasons or purposes for people using funds. It's anything from a customer having an opportunity to get a cash discount if they pay an invoice from a supplier within the next five days.
Michael: It's about having a marketing opportunity to go into market and there's a cost involved with doing that, to go along and utilise the funds for a marketing campaign as an example. The reasons for utilising the funds are wide and varied but I think the fundamental underwriting differentiation is the fact that it's around speed and ease. And that's really ... When I think about the value proposition there, kind of the fundamental themes for me, they're both in a direct and probably more importantly the broker space are very, very important. Because the reality is these transactions that are $150,000, the broker can't afford to be spending a lot of time collating a lot of historical data, collecting debt commitment schedules, collecting age, debtors age credit and so on and so forth that you typically see within a traditional banking underwrite.
Only having to provide three months worth of bank statements is very important for a broker because they're not investing a lot of time. Your question around turn around times, I think the best way to kind of share our response to that would be a specific example. We had a customer come on to our Facebook page last week. I think the inquiry came through at 10:05 am, that afternoon they had $150,000 sitting in their bank account.
Annie: Wow that's-
Michael: So the turn around times are certainly very strong, but I think what really drives is the credit model that we have to assist the transactions, and we can do that requiring only three months worth of bank statements.
Annie: So you're saying they're about doing health assessment. I know that ... Of the business. I know that recently OnDeck and Equifax have partnered up and something that I think is quite interesting in terms of what the lending side of things is doing is looking at not only the health of the business when you apply but then if you also then take on a loan later down the track you can actually see how you're ... You might have to correct me on this. But how the health of the business has improved or changed in any way. Is that right?
Michael: Yeah, yeah. Absolutely. Outside of requiring the customer provide three months worth of bank statements we have a very tight relationship with Equifax. So we look at an Equifax score that we've modelled in partnership with Equifax, and that's part of our credit decision model. And again, you're right. One of the features of this particular product is the renewal process. At that 50% pay down on the original term a customer becomes eligible for a renewal. We still go through exactly the same underwrite process, so we want to make sure we're a responsible lendee ... A lender I should say. And we will go along and complete another Equifax score, and we'll share that detail with the customer so that they can see the behaviours that they have in their business and how they translate to perhaps either improving or in some instances, in fact, diminishing the quality of their Equifax score.
Annie: I just want to talk about, you both mentioned social media there. You were saying a deal came through on Facebook and Neil you mentioned that you were also doing some social media marketing. I'm surprised by that. I wouldn't have thought necessarily a lot of deals would come through Facebook or Instagram or Twitter. I wonder if you could both tell us what social media outlets you are using, and which ones are potentially seeing more traction than others and why are you using those channels.
Neil: In our business, we use certainly Facebook, LinkedIn, and also from time to time Instagram as well. There's two parts to it. One is really creating brand awareness. I think what we try and do in those forums is really put out there not just advertising but informative content where people will look and resonate with the content and say, "I want to read that." And it kind of places us as a, in some way, a bit of a trusted adviser and so that's what we're trying to do through that channel. It's not a direct sell as such. We do do a little bit of advertising, but it's really trying to give informative content to people.
And we put one out there just recently around ... We talked about Equifax. The credit scoring system now and a lot of customers aren't aware, particularly SME businesses, of the new system that's in place with credit scoring. How it's now not just financial commitments that get recorded, but trade commitments and so forth.
Neil: The hit rate on that was amazing. We track how many people open it and so forth. You'll generally run at about 35-36% of people will open your content and read it. In that case it was up to about, I think about 58%. So people saw the tagline and thought, "Better read it." And our phones started ringing right away and all of a sudden from that came some transactions where started talking to us about, oh you know I also want to talk to you about my needs as such as well. We try and use that forum and in that way, rather than just as a direct advertising. We will do direct advertising from time to time, but generally it's try and build a brand and build a trust.
Annie: And Michael, you're talking there about Facebook. [inaudible 00:18:18] coming through Facebook channels. Is that your main route of social media?
Michael: I'd say it's one of the social media channels. Funnily enough, similar to Neil, whether it be Facebook, LinkedIn, a lot of the traditional, I suppose, channels are certainly used. But in addition to that we actually do a lot of in-market advertising as well, so radio we find very successful. We run that through most of the eastern seaboard states. We also do a lot of billboard advertising. We rent buses, we rent trains with advertising. So we've also gone down that path. In addition to that, we also do direct mail, which we find, as crazy as it sounds in this FinTech world, it's a terrific channel as well…
Yeah. It's funny, they ... I spent the first week with OnDeck in the US and when I was talking with them about the channels that drive origination, and they spoke of direct mail and I was in a time warp, but as crazy as it sounds it's still a good avenue to reach out to customers these days. It appears to have gone a full circle now. People kind of ... Referred spam when it hits their inbox, ten years it was kind of spam hit their letterbox.
Michael: So it's gone the full circle where actually you do get strong engagement through direct mail. So we've got a variety of channels as well as social that we use as a ... Say, in addition to a lot of the direct advertising we do in the market and then on top of that we obviously also use the direct mail channel as well.
Annie: Mm-hmm… Interesting. And just touching that about, you were saying you do some of the advertising just in the eastern states. Is OnDeck available nationwide? Is it just cities or?
Michael: Yeah, absolutely. We fund right through all states within Australia. As far as our broker channel, so we've just started hiring people in, we've got [inaudible 00:20:05] in Melbourne, in Queensland, in New South Wales. Throughout 2018 we'll look to expand. Potentially for a head going into WA we'll also increase the head count in Victoria, Queensland and New South Wales, but certainly we're funding right throughout Australia.
Annie: Great. Running out of time, but I just wanted to ask, Neil, you quickly, in terms of actually ... If a broker was looking to break into SME finance and, as you say, a lot of people might already have clients in their book. How would you advise, or what have you done that you think is a good sort of tip for someone breaking into this space?
Neil: Most certainly I think there's now been enough transactions completed out there. There's lots of great case studies around where cash flow lending into SME business works. I would encourage people to look at what industries does cash flow lending really apply. And what we've seen across the board, it can be diverse, but if it's retail, if it's customers who are buying stock, things like that where they've got turn around, those sorts of businesses they should target as the customer or potential customer. I think embrace the technology. So I think for referred brokers coming into this market, that the new cash flow lenders out there or the cash flow lenders in the market, they use technology very well. I think embrace that, use it, integrate it into your own business.
And then I think the other thing is, as I said, is be informative to the business out there. Have a purpose and have some value and provide that. And I think all of those together, it's a big market out there and there's a big opportunity in this space, and this type of lending is still relatively new in our market. And that's part of the thing, you also have to do, you kind of need to educate potential customers as well because I think, Michael highlighted before, the underwriting in this process is a lot different to what customers are used to from their banks or traditional asset finance or whatever. And so you almost need to educate them as well so it's not a shock even though it's a great system, it's not a shock to them that all of a sudden you're providing bank statements, or someone's able to access your MYOB accounts and so forth.
I think all of those things and you can certainly find a good customer base out there.
Annie: And Michael, any top tips for brokers?
Michael: Look, I think there's a huge opportunity. I encourage brokers to look within their database. They may be a traditional resi mortgage provider, they may be a traditional plant and equipment provider, but I think the alternate funding space is a growing opportunity. It certainly meets the needs of customers. And speak to your customers where the value proposition of speed and ease is important to them and can help deliver growth opportunities within their business because I think players like OnDeck are certainly in a position to help provide solutions that might otherwise potentially take six to eight weeks to get a response.
Annie: Great. I just want to ask quickly as well, [inaudible 00:23:12] future plans for OnDeck in the next 12 months you can tell us about. You were mentioning there about bringing some people into WA for example. Is there any other plans that you can tell us about that we were looking forward for?
Michael: Oh look, I think from our perspective we've had two terrific years in Australia. We're very optimistic about the Australian market. WE see the broker channel is an enormous channel that we want to support our focus and concentration moving forward. Beyond the next 12 months is certainly about growing that channel. We see it provides enormous value to the Australian business market and we want to be part of that growth.
Annie: Perfect. Well thank you so much for both coming in today and for telling us a little bit about SME, OnDeck and everything that brokers should and could be doing in this space. For more news on SME finance, please do visit theadviser.com.au and account for our SME adviser bulletin that goes out every Friday morning. Thank you for tuning in, and I'll catch you next time.
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