What SMEs really want

In September 2016, Australia’s leading SME magazine My Business surveyed its readers and asked for their thoughts on growth, profitability, and funding for the current financial year. The results provide an interesting insight into what small businesses want when it comes to finance, and, more importantly, how willing they are to use a broker.

The vast majority of SME respondents (62 per cent) said they had been in business for over 11 years and 70 per cent said they were looking to expand their business this financial year.

When asked about their financial performance the responses varied. On a positive note, only 14 per cent of SMEs expected profits to fall in FY17 compared to FY16. The bulk of small business operators (33 per cent) forecasted profits to increase by between 1 and 10 per cent, while 20 per cent predicted greater profit growth of between 11 and 25 per cent. 

What is the biggest challenge you face in your business? Source: My Business SME Insights Survey 2016

While the results clearly show that SMEs are eager to expand and expect profits to increase, only 31 per cent said they required finance to grow their businesses.

By far the biggest challenge for SMEs is attracting new clients, followed by cash flow and staffing.

When asked what was their biggest cost, an overwhelming number (69 per cent) of SMEs said labour, followed by capital (13 per cent) and other costs (19 per cent).

Interestingly, when asked which areas of finance are most important to their business, a whopping 78 per cent of SMEs said cash flow.

Which areas of finance are most important to your business?

Seizing the opportunity

Perth-based broker Michael Deegan of Do Financial has a diversified business covering residential, commercial, SMSF and business finance. He agrees that cash flow is by far the biggest concern among his SME clients.

Working with a team of professionals to deliver solutions for SMEs is the cornerstone of his business.

“We’ve got strong relationships with four accounting firms and six financial planners that refer business to us. Collectively we get together and sit down with the client and map out what their financial future will look like,” Mr Deegan says.

“When it comes to implementing those strategies, and putting products in place in line with discussions the client has had with their accountant and planner, we access products like lines of credit, asset finance and residentially-secured business loans,” he says.

“Where there is a product we don’t have access to, we will coach the client around how to put together an application and the information they will need to access that type of credit.”

How do you access finance?

Having a broad range of products is essential when dealing with SME clients, particularly those looking for a solution to their cash flow needs. Mr Deegan says there is no silver bullet or particular product that will fix a cash flow problem. Each SME is unique and requires a team of professionals to diagnose its needs before a broker can recommend debt facilities.

“There are three main types of SME clients that we see,” Mr Deegan explains. “There are the clients who are starting up and might have equity in their home and need to set the facilities up to help them with their initial cash flow.

“Then there are customers who are in a period where they are running pretty well and take on a new project and need to grow, so they need some assistance to manage the cash flow until the sales start coming through from a new product or contract.

“Then there are the clients who are starting to suffer as a result of their cash flow situation. Western Australia has seen a lot of that.”

For those clients who are struggling, Mr Deegan says his main priority is providing assistance and breathing space and helping them to negotiate with their lender to keep their finance options open.

“It’s about being able to trade through that difficult period,” he says, adding that accountants and financial planners are a critical component in this process.

Would you use a broker for your lending needs?

Huge growth potential

The bulk of SMEs still access finance from a bank (55 per cent). Only 21 per cent of SMEs surveyed use a finance broker while 24 per cent seek other avenues to secure finance.

Vow Financial head of commercial and leasing, Glenn Mitchell, says that while the broker share of the SME finance market is still small compared to the residential home loan market, it is growing.

“There are an increasing number of young executives coming out of the banking institutions taking a keen eye on this part of the market. It is a good area for them to grow their income,” Mr Mitchell says.

He believes brokers could easily be originating 50 per cent of SME finance deals within the next two years. Many of the finance professionals he meets, who are eager to enter the broking space, are looking for an aggregation partner that can provide access to business and commercial lenders.

“When you interview them and they are looking for an aggregator, that is a core component of the discussion. It’s not just around residential lending. These younger people that are coming through the banking institutions can see the various products in the marketplace across residential, commercial, debtor finance and equipment finance,” Mr Mitchell says. “They are very business savvy.”

When it comes to lenders, he said that ANZ have always been very dominant in the commercial space.

“That’s probably more centred around their expertise at the frontline. They’ve got a really good, long-term sales team and I’m sure my competitors would agree with me on that point.”

Vow’s annualised settlement figures from the 2016 financial year show that ANZ received the largest volumes of any lender for business and commercial finance with $220 million, followed by Westpac ($132.5 million) and CBA ($60 million).

The banks are clearly invested in brokers when it comes to SME finance. However, there is still a lack of awareness among SMEs about what brokers can actually do for them. The 2016 My Business SME survey found that only 44 per cent of SMEs would use a finance broker for their lending.

Would you expect to pay a fee for a finance broker’s service?

Do Financial’s Michael Deegan says part of the issue lies in the public perception of brokers being purely a channel for home lending.

“When someone wants to set up a business they automatically think about going to a bank and talking to their local branch manager or business banker, which is great that there is that support, but they usually won’t consider going and speaking to their broker,” he says.

“Part of the reason is that mortgage brokers aren’t very good at publicising the fact that they also do funding for SMEs.”

However, things are starting to change.

“In recent years, there are a number of ex-bankers leaving the banks and getting into finance broking. They have the expertise of working with SME clients throughout their career,” says Mr Deegan, who spent eight years at NAB educating accountants and planners about identifying the debt needs of their SME clients.

“We have strong relationships with accountants. That is where we receive about 99 per cent of our SME clients. The remaining 1 per cent would be word of mouth referrals.”

Would you be willing to pay a fee for service?

Willing to pay

There are more than two million SMEs in Australia. While many still don’t use the third-party channel, research indicates that they do value and will pay for the services of a broker.

When asked if they expect to pay a fee for a finance broker’s service, 55 per cent of SMEs said yes. More importantly, 63 per cent of SMEs said they would be willing to pay a fee for service.

Depending on the level of expertise in business finance, these figures should be viewed as a validation of the services brokers provide. They also indicate the potential revenue stream that SME lending can generate for your broking business.

Michael Deegan of Do Financial says about 75 per cent of his business is made up of residential mortgages. The remaining 25 per cent comes from SMEs.

While he doesn’t charge a fee for service, he can see the merit in doing so, particularly when he starts bringing more business clients into the fold.

“If I was going to increase the business lending side, which is already starting to happen, then I would consider introducing a fee for service,” he explains.

“Particularly when it comes to providing advice and providing the customer with the negotiation skills and language to deal with their bank directly, in instances where we don’t have access to the product for them.”

Other brokers, like Melbourne-based Stuart Styles, do charge a fee.

Mr Styles is the managing director of Arthurmac & Co., a traditional mortgage broker with a twist – the group specialises in non-conforming loans, self-employed clients and receives a fair amount of work from business and commercial clients.

“We always charge a fee, because the people who come to us are wanting a service and there is usually a time constraint. That’s why I’m guessing those 63 per cent of SMEs would be prepared to pay, because they don’t have the time to stand in line at the bank,” he says. “That’s really our edge on the banks.”

Mr Styles says he gets plenty of repeat business because in the SME space it is all about service and speed of delivery.

“SMEs have a wide range of needs when it comes to finance,” he says.

“Recently I had a client who needed $160,000. He was expanding his business and also needed to buy out his business partner. He had visited a handful of banks without success. We managed to help him out.

“Many people think that a broker can only access the same product that they can themselves by going direct to a bank. The reality is we have the depth of product knowledge.”

After operating in the business lending space for almost 14 years, Mr Styles has experienced plenty of change. He says there are plenty of new finance brokers entering the market.

“It’s getting far more competitive. I would say not even five years ago, it was pretty small, everyone sort of new each other,” he says.

Unlike residential lending the commercial space is still fairly unregulated. Professional standards remain high, and with more brokers entering the market, particularly those from business banking backgrounds, the wealth of knowledge among finance brokers is significant.

However, Mr Styles believes regulation is on its way.

“At the moment, it’s not covered by the NCCP. I do expect regulation to come in at some point, particularly if the sector keeps growing like it has been.”

There have been no clues from government about when regulation may take affect or even in what form. However, as we have seen in the mortgage broking space, regulation only strengthens the industry and fortifies the offerings of those operating in it.

There was plenty of fear among mortgage brokers prior to the introduction of the NCCP. But regulation has largely worked in favour of the third-party channel. The best players are still around, the bad apples are gone and market share continues to rise.