Whether you’re an old hand at writing SME loans, or just breaking into the area, it’s clear that SME financing is a burgeoning and exciting area of lending. Find out more about how you can fit into this lending space and how to diversify your skill set too.
Industry experts are naming small-to-medium-sized enterprise (SME) financing one of today’s most exciting lending spaces. There are several reasons for that. First, the potential client pool is enormous; there are well over 2 million SMEs in Australia that contribute to around a third of the country’s GDP.
Moreover, the opportunities to tap into this client base are enormous. According to Suncorp Bank, just 10 per cent of Australia’s SME market uses a broker for their lending needs. But there is a market to tap into; up to 30 per cent of the home lending customer market are potential SME lending clients.
In addition, the Australian economy is evolving, and legislators are making rapid changes in response. With money moving out of the resources sector, the government is switching its focus to what it has called the engine room of Australia’s economy: small business.
This has seen more lenders throwing their support behind the growing market by offering a range of new business products, supplemented by training programs for brokers. It seems there’s never been a better opportunity to diversify. Partly, this is because lenders are recognising the value that brokers can bring to the SME space. Currently, brokers account for around 30 per cent of business lending in Australia.
According to Chris Thomas, head of commercial lending at NAB Broker, that number is expected to go up.
“We predict the sector will experience similar growth to residential lending, where brokers hold more than 50 per cent of market share,” says Mr Thomas.
“Now is the time for brokers to get into small business and commercial lending, and at NAB Broker, we want to empower brokers with the right products, services and support.”
One of the biggest differences between residential and business lending is that while mortgage loans get measured on a basic points-based system, risk is much harder to evaluate in the SME space, because every business is unique.
That means a broker needs to understand how to calculate the risks and package the application well. According to John Encina, director of Macquarie Commercial Finance, that involves a lot more subjective thinking.
“The biggest challenge is understanding your client’s business and what the risks involved are. Then how you explain that to a lender and present the best case possible,” he says.
“We’re kind of like a barrister in court – trying to convince the judge about your case. Any case can be presented in any number of ways. The better you are at that, the better chance you have at winning the case,” explains Mr Encina.
In residential, brokers are typically provided with an upfront payment along with commission by lenders.
As Rob Ryan, head of northern region at FAST explains, brokers in the commercial lending space will find two main payment structures: ‘spot and refer’ and ‘full accreditation’.
“Spot and refer is offered to brokers who are happy to provide a name and number and let the banker complete the application,” says Mr Ryan.
“That’s generally for brokers with little experience in commercial or that don’t hold or operate under an ACL, and in this instance commission is generally an upfront payment only,” he says.
For brokers that have a better working knowledge or more experience in the SME lending space, there are bigger rewards.
“Full accreditation requires the broker to complete the entire application process and generally results in the broker receiving both an upfront and trail payment,” says Mr Ryan.
Get trained up
The biggest piece of advice John Encina has for brokers wanting to get into SME is to be prepared to put in some hard work and get trained up properly.
“A lot of brokers think it might just be an add on, but if you don’t invest time in understanding it then you’re not going to do the best thing for the client,” he says.
“Getting skilled up takes time. There’s a lot of nuances, in terms of how to put deals together and which lenders to use. If you just jump in straight away you’re going to damage your reputation,” he explains.
He advises going through the banks or aggregators fora list of training options.
“The banks offer great commercial lending induction programs, including online training and learning how to read financial statements,” he explains.
“Also try to get a mentor, because each lending deal is a bit different, so if you can find someone that’s willing to take you under their wing and guide you through the tricky deals, that’s good too,” Mr Encina suggests.
According to ING DIRECT’s John Kolyvas, who runs regular SME training sessions for brokers, financial analysis is one of the most popular aspects of their program.
“Most resi brokers won’t have done any financial analysis. So, when they first go to look at a self-employed business, they’ll just look at the profits and loss figures,” he says.
While that’s one part of financial analysis, Mr Kolyvas explains the important stuff is on the balance sheet; in other words, the assets and liabilities numbers.
Suncorp Bank’s national small business and commercial manager, Robynne Frost, says the next step after training is to work out a strategy, so that you can track your progress. She suggests first completing an honest assessment of your business strengths and weakness.
From this you can work out if you need to hire or outsource new capabilities. Brokers that feel less confident in some areas may want to consider referring clients to other specialists, or partnering with an aggregator or lender that offers active broker support.
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