Asset finance is emerging as a popular area of commercial lending for mortgage brokers considering diversification
In 2020, mortgage brokers tend to wear multiple hats in their daily roles. Diversifying beyond residential helps them guard against the risk of stagnation during markets in downturn, and branching into commercial property has proven to be a popular solution to complement their business.
Yet for Alan Rowlands, finance executive at Specialist Finance Group, such an approach is still too narrow. Brokers, he suggests, should be looking at other areas of lending that may be linked to both the residential and commercial property needs of their clients – specifically, asset and equipment finance.
Asset finance, Rowlands explains, allows businesses to purchase or lease assets that help produce income without having to use their own working capital.
“We used to refer to it as hire purchase, and it’s pretty broad, as you might imagine,” Rowlands says.
“I think it would be fair to say that the average person thinks of it in terms of large-scale purchases like trucks or heavy machinery. But in truth, it refers to just about any piece of equipment that can be used by the business to generate income, all the way down to computers and printers.”
But why diversify into such territory at all? If you’ve already advanced into commercial from residential or vice versa, is it worthwhile?
“First and foremost, if you’re not looking after your own customers with asset finance, there is a chance that someone else will,” says Rowlands.
Furthermore, Rowlands explains, not only does diversification support the growth and sustainability of your business but it also helps self-employed and SME clients to grow their operations. Lots of business owners aren’t actually aware that such loan products exist, and as a result may opt for products available from other providers that are either inappropriate or could potentially increase their long-term debt.
“You can provide your client with a broader service proposition beyond just residential home loans,” Rowlands says.
“Certainly, there’s a learning curve, but it’s all knowledge that can be built up over time.”
Another key advantage that this form of diversification offers is that it doesn’t necessarily require a lot of legwork in terms of sourcing new customers. If you’re using a smart CRM, you should already have an existing client base and prospects, and identifying those who are sole traders or SME owners should be a relatively simple process.
“If you’re looking to diversify your business, the best place is to start is with your existing clients,” says Rowlands.
“If you were to look through your existing book of business, you’d no doubt find brokers with self-employed clients who have business finance needs and would be happy to have your help.”
Business owners love to talk about their business and the future plans they have for that business, says Rowlands. Conversations with them are an opportunity to learn about their processes and the industries they service, the equipment they use, and whether they are facing any challenges.
“This can open up the door to asset finance, in addition to business finance, cash flow lending and insurance premium funding,” says Rowlands.
Rowlands also notes that a good broker should always be on the lookout for products and services that align with their clients’ needs.
“It’s an ongoing conversation,” he says. “Good brokers have their finger on the pulse of what their clients do and what their clients need – but conversely, clients also need to be made aware of what their brokers can do for them. When the need does arise, the client can be confident that his or her broker can assist with their asset finance needs.”
Of course, Rowlands says a mortgage broker just starting out in this arena can’t realistically be expected to know every-thing – it’s such a broad field. What’s more important is knowing the basic details and being able to access additional information or a quote as necessary. As with any other area of broking, knowledge is built through a combination of time and experience.
“Don’t be afraid of what you don’t know,” says Rowlands. “Ask lots of questions and get guidance from your aggregator and lender BDMs. If possible, new asset finance brokers should consider shadowing more experienced brokers or ‘spot and refer’ deals to specialist asset finance providers in order to learn the ropes.”
However, Rowlands does caution that brokers and clients should also be working with an accountant to assess other factors – how the loan is going to be structured, for example. Due diligence by both the client and the accountant is important before undertaking a new lending facility.
“One of the unique things about broking in this space is that the item being financed is often the form of security for the loan,” explains Rowlands.
“It’s also usually depreciating in value from day dot, so you need to make sure you have all of the right info at hand from the start. You need to be looking out for your client’s best interests, and sometimes that means not getting them the loan if they’re not in a position to handle it.”
Rowlands says there is considerable help available for brokers who are looking to branch out into new territory. It doesn’t have to be an intimidating process if you surround yourself with the right people and utilise the right tools, he explains.
This is not to suggest that everything will necessarily be smooth sailing. The pandemic has led to unprecedented challenges for Australian businesses, and its ongoing potential effects on the Australian economy remain uncertain.
Rowlands points out that many asset finance lenders have also announced temporary changes to their application processes and credit policies, especially for new-to-bank customers or those industries adversely impacted by COVID-19. And some lenders have temporarily suspended accepting new accreditations or transfers.
Nonetheless, Rowlands believes that over the coming months there will be numerous opportunities for brokers to reach out to clients and discuss the possibility of applying for asset finance.
“Changes to policies notwithstanding, lending rates have never been more competitive,” says Rowlands. “The end of the financial year is approaching too, so equipment suppliers are probably going to be keen to make deals close to tax time, particularly in light of the wider economic downturn.”
Rowlands also points to the initiatives the Australian government has introduced in order to support the country’s businesses and economic growth in the short term, and to encourage a stronger economic recovery post COVID-19.
“Many of our members are already helping their SME clients to finance new equipment and take advantage of the increased instant asset write-off and accelerated depreciation provisions (for example Backing Business Investment) as part of the stimulus package,” says Rowlands.