How diversification builds sustainable businesses
Higher competition for home loans and a need to offer customers a wider choice of lending solutions is driving mortgage brokers to take up commercial finance.
The MFAA Industry Intelligence Service 16th Edition report, covering 1 October 2022 to 31 March 2023, shows that the total loan book value of commercial lending for mortgage brokers continues to grow, reaching a record high of $73.11bn. Period-on-period, the value increased by $3.06bn, or 4.36%, while year-on-year it grew by $6.41bn or 9.61%.
It’s estimated that only about 30% to 40% of all commercial loans are written by a broker, providing a large untapped market for the third party channel.
To get some insights into the commercial diversification opportunities for brokers, MPA talked to Blake Buchanan (pictured above left), general manager of aggregator Specialist Finance Group, and Zeb Drummond (pictured above right), chief operating officer at Gateway Bank.
More brokers looking to diversify Buchanan says it’s typical in cooling markets for businesses to look to capitalise on wider opportunities and potentially replace revenues. It’s also true that many brokers are looking for a more holistic approach to assisting clients.
“As lenders evolve their commercial offering and appetite for broker-introduced business, brokers are finding it easier to take the steps to learn about and offer their clients services in the commercial, business and equipment fields,” he says.
SFG is always looking to serve the needs of its brokers, Buchanan says. This includes providing education and access to commercial providers, and progressing digital development to ensure brokers can offer leading products, services and technology for an excellent client experience.
Drummond says diversification is often born out of challenges in traditional markets.
“It appears as though the challenges in the residential sector, driven by the increased rate environment, have led to residential brokers looking for new niches and sectors to support their business growth,” he says. “The other driver will be customer demand. At Gateway, we’re seeing increased enquiry through our direct channel as borrowers are looking to take advantage of opportunities in the market.”
Industry needs to encourage diversification
Drummond says there remains some mystique and opacity around the commercial lending sector, particularly around pricing and what will and won’t constitute a deal. For those brokers who only see a commercial deal every so often, this can be a barrier as the perceived challenges and complexity prevent them from pursuing the opportunity.
“Across the industry we would like to see more education, transparency and collaboration to help remove the barriers for residential-focused brokers looking to diversify into commercial lending,” Drummond says.
While commercial deals can be more complex, Gateway knows that working closely with brokers who haven’t had much exposure to the sector gives them the knowledge and confidence to look for more opportunities and come back for repeat business.
Buchanan says commercial finance is a specialty that requires significant learning but also experience for brokers to be able to execute well.
“Commercial share is lagging behind residential, particularly on the digital side. Much work is being done here, and we are already seeing the benefits of advocacy of this channel with an upswing in commercial broker market share.”
For brokers looking to enter this space, Buchanan says the best advice is they should “invest in education and become aware of the opportunities to assist clients first”.
“Engage with your lending partners and mentors in this space for quality advice and assistance, and make sure you invest the time to develop your business in this field.”
Buchanan encourages brokers to consider entering into a referral relationship with a commercial specialist or employing one in their business. “It’s rare to find an expert residential broker who is also an expert commercial broker,” he says.
The benefits of commercial diversification explained
Apart from the revenue boost, Buchanan says diversification serves brokers’ clients well by offering them a more holistic service, reducing the need for them to approach multiple people for different financial transactions.
It also assists with client attrition. “If you can’t identify your clients’ commercial finance need nor manage it, your client will likely go to a commercial broker who might also take your residential business,” he explains.
Buchanan says brokers employing or partnering with a commercial specialist have the immediate benefit of expanding their services and client management – “also increasing the value of your business should you look to exit".
Drummond points out that diversification can help build a more sustainable business and loan book as different lending sectors can have very different drivers of opportunities and challenges.
Opening up new markets offers brokers obvious growth opportunities, Drummond says. It can also bring in new referral partners, benefiting new and existing elements of brokers’ businesses.
Growth areas in commercial lending Gateway is solely focused on commercial property lending, Drummond says.
“We’re seeing strong demand in this segment of the market, with clients looking to utilise equity in their commercial properties, along with investors taking advantage of opportunities to build and diversify their portfolios.
“Gateway’s commercial offering is competitively positioned, and we’re also seeing strong demand for refinance to deliver savings in an increasingly challenging economic environment.”
Buchanan says many businesses are looking to improve cash flow as interest rates rise and affordability dwindles. This can be achieved in many ways, such as by financing an existing or new asset or using the many bona fide SME options available on the lender panel.
“Commercial specialists often think outside of the box,” Buchanan says.
He gives the example of a baker who bakes 400 loaves of bread per day and usually runs out by 11 a.m.
“They are feeling the pressure of higher interest rates and higher costs of goods. They seek out a commercial broker to refinance their debts or get a loan to improve cash flow.”
But a commercial specialist might suggest financing a new oven for the baker “who now produces 800 loaves per day and subsequently increases their cash flow”.
Training and support
SFG proudly hosted its inaugural Commercial Convention in August.
“This highlighted our fantastic commercial partnerships, talent and systems of the future to make diversification into commercial easy to understand,” Buchanan says.
“We highlighted the opportunities and the resources available that brokers should be tapping into,” he says. “SFG takes a unique and individual approach to our members’ businesses and the strategies that we [use to] assist; we know that each brokerage is different to the next.”
Gateway has a dedicated commercial banker who works closely with brokers, particularly those new to the segment, throughout the application process and until settlement, Drummond says.
In this role, they also work closely with the bank’s residential BDM team, running workshops and training sessions and educating brokers on commercial opportunities as well as Gateway’s offering.
“We’ve tried to make our product as simple and borrower and broker-friendly as possible,” Drummond says.
“We’ve integrated the application process into ApplyOnline, giving brokers a consistent digital experience in line with their residential experience. We’ve also enhanced our broker portal to enable applications to be simply and easily lodged with us.”
Combining this digital experience with a collaborative personal service assists all brokers, he says.
Gateway offers a 30-year loan term, which combined with competitive rates provides real cash-flow benefits to borrowers, he adds. Commercial loans vary from $250,000 to $10 million, with a range of fixed, variable and interest-only options.
The bank recently launched a green commercial property loan with discounted interest rates for properties with certified energy-efficiency ratings.
What brokers need to know Drummond says brokers should be aware that there’s often more complexity in commercial lending due to ownership structures, security types and revenue fluctuations.
“None of these are insurmountable, and with a collaborative approach from a BDM or commercial banker, these can all be worked through,” he says.
Buchanan says that while additional qualifications are not usually required, industry bodies are lifting the qualification requirements to trade in the commercial space, which SFG supports.
“You only need to google ‘commercial finance types’ to see how broad of a church commercial lending is in comparison to residential, and this is why it takes commitment to learn and understand commercial finance to ensure great results for clients.
“Great client results provide great commercial broker dividends such as increased awareness and market share.”
Buchanan says he anticipates a lot of restructuring work being completed in the first half of 2024 as interest rate increases bite, which will affect commercial as well as home loan customers.
“Businesses often also have debt, with the difference being that their costs of funds usually sit above home loan costs. This is why we need to ensure that access to commercial broker specialists increases in time and that we grow broker share.
“I encourage brokers who want to expand into this space to make sure that they do it well and market it to create more awareness for this important channel.”
Drummond says the outlook for commercial lending in 2024 will be heavily influ- enced by the progress made against inflation and the interest rate environment.
“Forecast continued strong population growth should continue to underpin resilience in the economy and support a positive outlook for the year ahead,” he says. “The commercial sector remains a significant opportunity for brokers to increasingly diversify into and support their clients’ needs.”