SME lending volumes set to rebound

Non-banks and brokers can help businesses grow

SME lending volumes set to rebound

With global economic challenges, rising interest rates and inflation, supply chain bottlenecks and labour shortages, a cavalcade of problems have hit Australia’s small to medium-sized businesses in the last 12 months.

This is reflected in the June 2023 Equifax Quarterly Commercial Insights report, which showed that while asset finance applications had increased by 7.8%, overall business credit applications had fallen by 1.3%.

But the path ahead is looking better. ABS monthly figures for the 12 months toAugust showed a rise of 5.2% in inflation, but this was down from 5.4% in June and 8.4% in December. The RBA has also kept the cash rate on hold for the last four months, with many experts believing the rate-hiking cycle is at its end. Interest rates cuts are predicted for 2024.

Non-bank  lenders  AquamoreGrow Finance, OnDeck Australia, RedZed and Prospa have given MPA their insights on the SME market and the key role of brokers. They say brokers need to stay in touch with their SME clients, assist them with cash flow management and direct them to the right loan options to help them grow in better times.

Factors affecting SME demand for finance

Adrian Fisher (pictured below), head of distribution and product at RedZed, says cash rate uncertainty and a gloomy global economic outlook  have likely contributed to the decline in SME lending demand.

Adrian Fisher

“Index results have shown fluctuations in business confidence and conditions over the past 12 months as businesses continue to  rebound from the impacts of COVID whilst managing the effects of high inflation and an employee-favoured market,” Fisher says.

Changing levels of business confidence and challenging business conditions, as well as doubt over future cash rate decisions, mean many business owners have sat back and adopted a ‘wait and see’ approach, thus impacting lending demand.

“However, in times of uncertainty it’s often those who are brave, innovative and prepared to step outside of their comfort zones that reap the rewards,” says Fisher.

OnDeck Australia CEO Cameron Poolman (pictured below) says an overall decline in business lending of 1.3% year-on-year does not indicate an ongoing trend or a massive fall in demand for finance.

Cameron Poolman

“Asset finance jumped 7.8% in the quarter as small businesses took advantage of temporary full expensing ahead of 30 June,” Poolman says. “However, there is no doubt some small businesses are feeling the squeeze of reduced household spending as Australians juggle rising living costs and mortgage interest rates that have jumped 4% in the space of 12 months.”

Poolman says it’s worth pointing out that – as Equifax notes – a key driving factor behind the reduction in business lending is not demand; it’s more on the supply side as lenders impose tighter borrowing conditions.

“This highlights the value of small businesses looking beyond their everyday bank for commercial finance and discovering the benefits of partnering with a lender that only focuses on small business funding.”

Matthew Porch (picture below), head of distribution at Aquamore, encourages brokers to firstly focus on the substantial growth in asset finance applications, which is a good indicator of business confidence.

Matthew Porch

“Conversely, market turbulence, rate uncertainty, labour shortages and an increase in goods/operations have understandably a ected the appetite for business loans.”

Porch says he expects business owners to continue to be cautious about additional spending, compounded by the cost of borrowing becoming more expensive.

“This apprehension a ects a broad spectrum of commercial finance, though it should be viewed in the context that Australia continues to demonstrate a robust economy,” he says.

Prospa national sales manager Roberto Sanz (picture below) says the decline in small business lending demand could be attributed to different factors, including stubborn inflation, the rising cost of debt, tighter borrowing conditions and shrinking levels of discretionary spending by consumers.

Roberto Sanz

“Against this backdrop and with higher operational costs, small businesses may be cautious to take on additional debt or look for alternative sources of finance,” he says.

Sanz says a slowdown in wage growth could also make it harder for households to have income available to spend at small businesses, which could impact sales in the coming months.

David Verschoor (picture below), CEO at Grow Finance, says the increase in asset finance applications likely had a direct correlation to the instant asset write-off initiative and EOFY where purchases were brought forward into FY23.

David Verschoor

“With the fall in business loan and trade finance, this is a space we are watching closely as we may be seeing a decline in demand as a result of businesses reducing inventory due to the decline in economic activity and rate rises,” says Verschoor.

Future outlook

Consumer sentiment rallied in July 2023 on the back of an interest rate pause in the “perhaps naive anticipation that rates would be retained indefinitely”, says Porch.

“On the contrary, it’s very clear that the rate pause is not expected to be infinite. We expect demand for finance to coincide with rate Sanz says the environment of higher inflation and interest rates has negatively impacted business demand and put strains on SMEs’ supply chain and the cost of materials and goods.

“With these pressures easing in a stabilising environment, we can expect to see small business owners more confident to commit to external funding to capitalise on growth plans and/or cash flow cover for the months ahead.”

June data shows that a third of SMEs are strategically prioritising launching new products or services over the next six to 12 months to help drive consumer demand, Sanz says.

“Prospa knows more and more small business owners are looking to their brokers to inform their decisions on borrowing products, with 21% of SMEs specifically seeking out their advice.

“This growing dependency on brokers could create further opportunities for financial advisers to diversify into SME lending, and drive a need for more advisers to keep an eye on the competitive landscape.”

Grow Finance is seeing a normalisation of demand for financing as the December quarter approaches, Verschoor says.

However, he believes the September quarter is likely to be soft across the board. “Leading into the back end of the year, we will likely see a vast increase in business loan applications due to businesses requiring cash to see them through the falling period of demand,” he says.

“Businesses will have the ability to operate with greater clarity and certainty with respect to ongoing cash flow and funding requirements, which often brings a renewed focus on investment in innovation, diversification and expansion.”

Grow expects many businesses will look to  recapitalise some of their funding facilities to more favourable solutions. Verschoor says supply chain and labour shortage issues should ease, “all of which naturally creates opportunity and increased demand for various financial solutions”.

Fisher says history has shown that when the cash rate is stable, demand for credit is strong. “Stability, or better yet a gradual decrease in the cash rate, will give borrowers confidence to invest in wealth creation opportunities, and encourage business owners to invest in business growth.”

Many experts are predicting a more stabilised interest rate environment, with some suggesting that a reduction in rates might be on the horizon. Fisher says it’s encouraging to see inflation tracking down towards the desired target range.

“We expect history to repeat itself and are confident that lending volumes will rebound swiftly as a result of borrowers returning to the market.”

Poolman says most economists expect interest rates to drop some time in 2024. “When this happens, the small business sector will benefit from a boost to consumer confidence, which is critical for household spending.”

Australian households are sitting on a record $1.4trn in personal savings, says Poolman, so there’s cash available for personal spending, but current uncertainty means many consumers are adopting a wait-and-see approach to spending.

“Once interest rates and inflation have settled into more normal patterns, I’m confident we will see an uptick in spending and a return of confidence, which will drive demand for business finance.”

Broker partnerships with clients, lenders

Woszczalski (picture below) says that before speaking to clients about products, it’s important for brokers to ask questions to understand how the business is performing and what’s keeping the owners up at night. Once this is known, brokers will find themselves in a “well-informed position to engage with their lender panel, and source and recommend the right solutions”.

Gregory Woszczalski

“We know that the best and right time to access money for the business is when you can get it rather than when you need it.

A business loan overdraft is the perfect solution for many SME customers as you don’t need to pay for it now but can still access the funds.”

Grow has set up a standalone team providing increased support to brokers who may not be confident in its product suite, or who are in the process of diversifying or simply want to spot and refer more deals.

“Our sales and credit staff are on hand nationally to assist brokers and their clients with larger and more complex opportunities, and on the flip side, our online tools and broker portal enable experienced brokers to operate seamlessly and with a high level of independence and confidence,” says Woszczalski.

Aquamore encourages brokers to discuss cash management strategies, including possible cash flow solutions, with their clients to minimise their exposure.

Debt consolidation is prevalent, Porch says. “Aquamore is writing a record volume of bespoke debt consolidation facilities whereby we’re replacing SMEs’ short-term, higher-interest-rate loans with more competitive medium-term debt solutions with more manageable terms.”

Porch says brokers should also review their clients’ spending, invoice management and trade terms to see where savings can be made and where changes to terms could “alleviate cash flow concerns for a more manageable day-to-day cash position”.

“This should ideally be done in conjunc- tion with the business’s accountant.”

Sanz says that with interest rates rising and business margins being squeezed, small businesses need their brokers more than ever.

“For mortgage brokers, anticipating their clients’ needs and being ready to act will ensure they have the right solutions in place for their clients’ cash flow needs.

“This means asking questions about the client’s business, and investigating options to support cash flow. What is their cash flow forecast? What pain points or opportunities are on the horizon? What investments could set them up for both short and long-term growth?”

By empowering mortgage brokers to diversify their revenue streams and get involved in business lending, Prospa helps them engage with their clients about poten- tial cash flow issues and anticipate opportu- nities for growth.

Sanz says it’s not about brokers deviating from their core business but about Prospa offering a ‘spot and refer’ service model that enables mortgage brokers to make the most of opportunities without overinvesting outside their core businesses and in turn support small business clients.

Prospa provides tools and training to help brokers identify opportunities to address the cash flow challenges of their SME clients.

“Simply engage with our team of dedicated business development managers or access the Prospa Partner Portal, which helps streamline the rest of the process,” says Sanz.

Poolman says brokers need to let their small business clients know that there’s an alternative to traditional banks when it comes to finance.

“It’s not just about partnering with a lender that understands small business and how it works,” he says. “I’d encourage brokers to help their small business clients know that specialist small business lenders offer a far simpler and quicker application process and deliver fast response times.”

As a guide, OnDeck’s popular Lightning Loan product for funding up to $175,000 requires just six months of bank statements, Poolman says. “We can have an assessment to the broker within 30 minutes and funds to their small business client in as little as two hours. This level of speed allows the business to action their plans immediately.”

Fisher says that unlike a typical “mum-or-dad borrower” who might only engage with their broker once or twice during their loan term, self-employed borrowers are often looking for a “trusted advisory panel” that they can turn to regularly – usually their accountant, financial planner, business coach and finance broker.

“It’s essential that brokers talk to their SME clients at length and understand their businesses intimately, beyond financial statements. Business life-cycle stage; short, medium, and long-term business plans; and the importance of securing the right amount of funding for sustainable growth should be discussed,” Fisher says.

Equipping clients with finance product knowledge is also key to helping them achieve business goals, he says. “The right product at the right time can be incredibly valuable to a business, whereas the wrong product can have disastrous effects.”

RedZed’s highly skilled BDM team are experts in self-employed lending and work incredibly hard with brokers to help them deliver superior outcomes to customers, Fisher says.

RedZed has invested in a self-employed-centric training course to educate brokers about self-employed borrowers. Known as RedZed’s Self-Employed Broker Academy, it will be launched in October.

Fisher says it highlights the opportunities in self-employed lending, dispels any fears or misconceptions brokers may have about working with self-employed customers, and provides brokers with the knowledge and tools they need to embrace this community.

“There is even a module dedicated to understanding financial statements as some brokers avoid working with self-employed clients due to their lack of confidence in this area.”

Challenges SMEs face – and the solutions

Sanz says cash flow management is a challenge for many small businesses, with rising prices and high borrowing costs affecting their margins and profitability. “For small businesses with mortgage debt, higher scheduled mortgage payments are a key driver in limiting spare cash flow.”

Borrowers with variable rate loans have experienced large repayment increases, and there are early signs of financial stress as SMEs struggle to service their loans and run their businesses.

Sanz says Prospa is leading the way with simpler, stress-free and seamless financial management services.

“We’re bringing back together the finan- cial products that have become fragmented, to create a singular, holistic customer experience, empowering small business owners to take control of their financial health and their growth potential.”

Prospa also has a dedicated team of loan writers and senior credit officers who work directly with brokers on larger deal sizes to ensure these are assessed before going for credit approval. “This premium service is highly regarded by all our partners, specifi- cally commercial brokers.”

Fisher says the biggest problem facing SMEs is the uncertain economic outlook and the potential impacts it could have on businesses. “However, this uncertainty could be used to the advantage of those brave enough to push forward regardless and keep them one step ahead of their idly sitting competition.”

RedZed provides finance solutions for self-employed borrowers backed by residential or commercial property, Fisher says.

“Aside from purchase and refinance loan purposes, we also provide finance to assist business owners with working capital, acquisition of business and personal assets, repaying ATO debt, consolidating personal and business loans, and much more.”

He says RedZed’s continued investment in technology has helped the team achieve consistently fast turnaround times.

“Simple, fast and fair is a phrase synonymous with our business – simple process, fair assessment and fast approval,” Fisher says.

Poolman notes that small businesses face a variety of challenges: labour shortages, supply chain bottlenecks and consumers being more careful with their spending.

“Tighter borrowing conditions among lenders are an added hurdle for small businesses,” he says.

While not every business is doing it tough, Poolman says those looking to invest and expand often find it difficult to secure finance because their bank either won’t come to the party or because they face a protracted appli- cation and approval process.

“As a fintech, OnDeck uses a technology- driven approach to assess credit applications. Our KOALA Score™ risk-predicting credit model uses a sophisticated blend of big data, predictive analytics and statistical techniques in combination with data from multiple credit reporting agencies, including illion and Equifax, to support more tailored risk assess- ment for Australian small business lending.”

Poolman says KOALA gives OnDeck the ability to analyse the personal credit scores of business owners. It’s a plus for newer enterprises that don’t have extensive trading data, and for sole traders and partnerships, which don’t generally have the substantial volume of commercial data required by traditional lenders.

“By using a mix of commercial and consumer credit history plus cash flow, OnDeck is able to build a holistic risk profile in just minutes, giving small businesses improved access to the fast funding they need,” Poolman says.

At Grow, Verschoor says one of the bigger problems facing SMEs is the uncertainty surrounding the December quarter due to falling consumer demand, possibly impacting on the Christmas rush.

“We’ve seen retailers begin to cut back on spending and stock heading into the back end of the year as they expect to see reduced customer demand,” he says.

Another ongoing challenge for businesses is ensuring they have the right financing to operate efficiently and effectively while resisting the temptation to enter into short-term ‘Band-Aid’ solutions that may not be sustainable or beneficial.

Verschoor says Grow offers a range of products to help SME clients better manage their cash flow and operate more efficiently, including asset finance, business loans and insurance premium funding.

“We utilise market-leading technology to ensure brokers can access our products online with absolute ease, offering some the quickest turnaround times on applications and settlements in market.”

Porch says cash flow management remains an ongoing challenge for many businesses.

“We continue to see a lot of strong clients who just aren’t managing their inflows and outflows efficiently.

“To address this, Aquamore has a fully drawn advance interest-only product that’s been created to support businesses in consoli- dating debt or that need an equity release to assist with working capital requirements when cash flow is tight or needs to be massaged.”

Aquamore has also recently extended its interstate BDM team and credit and operations team “to ensure we continue to make quick and consistent credit decisions”, Porch says.

Diversification opportunities

Poolman says a broker’s business is an outstanding personal investment – and all investments benefit from diversification.

“Expanding into commercial lending gives brokers an additional revenue stream and the opportunity to engage with new clients and build new network partners to grow referrals and repeat business,” he says. “OnDeck supports our broker partners to achieve this diversification with a freely available suite of marketing collateral.”

Brokers are also encouraged to use the Know Your Score online tool as an ice breaker with small businesses, to help them understand that their enterprise has a credit score and the strategies that can keep their score healthy.

Poolman says more than 2.5 million businesses operate nationally – the vast majority being small.

“Given the sheer numbers, it’s almost certain that brokers will have small business owners among their existing client bases. This can make existing clients a good place to start, and it allows brokers to establish themselves as a one-stop shop.”

Woszczalski says the benefits of broker diversification are very real in terms of future-proofing their income streams, increasing earnings and fostering client retention.

“Like Grow, there are a number of lenders and advisory services in market who have the infrastructure in place to make diversification into business lending seamless,” he says.

“We believe we can give mortgage brokers the same strong experience that we are currently giving to our commercial and asset finance brokers,” says Woszczalski.

Grow operates a dedicated team to assist mortgage brokers by providing the required training, support and tools to ensure they are set up for success.

Woszczalksi adds that updating digital marketing and advertising efforts ensures maximum exposure to both existing and potential clients, increasing awareness and reach to the right audiences. “Feedback from the many brokers we deal with daily is that, on average, over 30% of their existing client base is made up of small business owner operators, and this is a natural place to start.”

Fisher says there are challenges and risks for brokers who only offer residential lending solutions to mum-and-dad borrowers.

“Diversification is regularly discussed within industry circles and at broker events because it’s not only a way of spreading risk, but it strengthens client relationships and supports business growth.”

Diversifying into the self-employed space can open doors to a wide range of finance solutions, including business loans, over-drafts, asset finance, invoice finance, commercial loans and more.

Fisher says self-employed borrowers represent a great deal of value to brokers because they generally transact more frequently, often require a diverse range of  loans and are typically easier to retain as clients because they appreciate the support and enjoy accessing a variety of solutions in one place.

For RedZed-accredited brokers, Fisher says the lender’s Self-Employed Broker Academy is the perfect training ground for residential brokers looking to diversify into SME lending, as well as those eager to upskill in servicing their self-employed clients.

“For those not yet accredited with us, we encourage you to contact your local RedZed BDM and start the accreditation journey.”

Porch says there’s widespread acceptance of diversification into alternative finance, particularly in the commercial sector.

“It’s encouraging to see so many brokers proactively upskilling to understand the nuances of the different lending profiles. Aquamore consistently collaborates with lenders in the non-bank and fintech sectors to educate brokers about SME lending, and also regularly hosts educational webinars.”

Sanz says mortgage brokers have achieved the most difficult first step of any business: customer acquisition. “They have delivered value and built trust with their self-employed or business-owner customers by helping them acquire or refinance their homes.

“Why not ask the next question? How are you managing your business cash flow? If they are not asking this question, it’s a lost opportunity, because if there is one thing that’s certain in our world, it’s that every business owner requires fast access to cash at some point during the year.”

Prospa has pioneered a system that makes it easy for brokers to diversify into cash flow lending, says Sanz, whereby the lender does the hard work for the client but the broker ultimately holds the client relationship.

“By offering a menu of services and providing proactive guidance and assistance on asset structuring and cost minimisation, brokers can transition from solely facilitators of mortgage transactions to business advisers, allowing them to open new revenue streams and build longer-term relationships.”