Freedom of choice for borrowers

A growing number of people don't fit the prime borrower profile, providing opportunities for non-bank lenders to offer specialist loan solutions

Freedom of choice for borrowers

It’s hard to believe it’s already March 2022 and Australians are hopefully close to the point where we can leave COVID-19 behind in our collective rear-view mirror, with businesses recovering and a return to a sense of normality.

While the last two years have been tough economically, socially and mentally, non-bank lenders have continued to support brokers and their clients with their finance needs.

Unlike the major banks, which have largely narrowed their lending to focus on PAYG prime residential home loan customers, non-banks have continued to offer finance options for those clients that don’t fit the vanilla profile, such as the self-employed.

The specialist lending market is growing for a number of reasons. More people are becoming aware of the variety of finance options available to them, thanks to their brokers. And as the economy bounces back, SMEs are seeking finance for equipment, infrastructure and debt consolidation.

MPA spoke to leading non-bank lenders Pepper Money, Liberty, La Trobe Financial and Grow Finance – which all have specialist lending in their DNA – to find out what they offer in this space and how they can assist brokers and their clients.

What is specialist lending? 

Liberty group sales manager John Mohnacheff says specialist loans are designed to support customers who may not fit traditional lending criteria, providing greater freedom and choice.

“By taking a more personalised approach, specialist lenders like Liberty can provide options tailored to a customer’s unique circumstances to help find the best fit,” he says.

Mohnacheff says Liberty, as one of the first Australian lenders to offer custom solutions, understands the diverse needs of these borrowers and how vital they are to the market.

“Whether a customer has experienced previous credit issues or simply prefers to do things differently, specialist loans support brokers to help more customers achieve their goals,” he says.

Cory Bannister, senior vice president and chief lending officer at La Trobe Financial, says a ‘specialist’ borrower sits just outside the bank’s automated underwriting credit criteria. They require manual desktop underwriting credit assessment techniques to appropriately assess and ultimately approve their application.

“A common misnomer is that specialist borrowers have impaired credit; this is simply not the case,” Bannister says.

“Factors resulting in a borrower being overlooked by major banks include unforeseen changes in employment, variability of income or expenditure, or simply seeking a product that is no longer being offered by the major banks, such as in the case of an SMSF.”

Pepper Money general manager mortgage and commercial lending Barry Saoud says specialist loans are designed to provide financial options for borrowers who are unable to meet the requirements of traditional lenders for a range of reasons, including not meeting credit score requirements, having an impaired credit history, or being unable to provide the traditional income verification documents.

“Traditional lenders like traditional income,” Saoud says. “But in real life, people earn money in different ways – from the self-employed to contractors’ shift work, casual work and more. You’ve got a subset of Australians who are very successful on their own merits, but they’re generally shut out of prime loans simply because they don’t fit the strict lending criteria.”

Co-CEOs of Grow Finance David Verschoor and Greg Woszczalski define specialist lenders as providing finance to individual or business borrowers that fall outside the lending criteria of mainstream funders.

“Specialist lenders are renowned for being more flexible in their loan criteria and accept borrower profiles,” says Verschooer.

“The groundswell of non-bank borrowers continues to sustain demand for specialist finance loans, particularly in the buoyant small business sector. SMEs are now in an enviable position of being able to access a broad spectrum of specialist asset finance and working capital loans that support growth.”

Specialist loan offerings

Saoud says Pepper Money has always been passionate about providing real-life solutions, especially in specialist lending.

“We take an inclusive approach to lending, meaning if we can find a way to help, we will. Instead of just using algorithms, we developed a more flexible approach that allows us to assess cases individually.”

Pepper Money’s client base extends from blue-chip to blue-collar and includes home loans, car and electric vehicle loans, equipment and asset finance, commercial loans and personal loans.

Saoud says it offers a great range of competitive, flexible loans for the growing number of customers who are finding it difficult to secure a loan through banks and other traditional lenders.

“We intimately understand the needs of the self-employed and specialist borrowers and individually assess each home loan application on its individual merits.”

Pepper Money supports brokers in helping customers achieve their goals and, by listening to feedback from brokers, customers and BDMs on how to improve products and services, “we have been able to create and maintain an award-winning specialist suite”, Saoud says.

Boasting 70 years of finance innovation and the title of Australia’s oldest non-bank of size, with $13bn of assets under management, La Trobe Financial has the heft and scale to be regularly considered as borrowers’ top choice, Bannister says.

The key differentiator is La Trobe Financial’s product range.

“We have the broadest product suite in the non-bank market which has been modelled on having a product for every life cycle in mind for brokers, and our loan size goes much deeper – up to $25m,” says Bannister. “Our product suite covers everything from prime to near prime, residential and commercial, development finance, SMSF solutions, aged care and first home buyers.”

La Trobe Financial also understands that the typical broking business is evolving from a ‘monoline’ operation focusing on residential, commercial or asset finance to offering a more diversified, holistic suite of products and services.

“We have adapted our business in line with this change,” Bannister says.

Grow Finance is a leading non-bank business lender that was recently recognised as the fastest-growing company in the 2021 AFR Fast 100 following a 549% year-on-year increase in revenue.

“With a diverse portfolio of asset finance and working capital solutions, Grow is increasingly the non-bank of choice for businesses borrowing up to $5m to boost growth,” its co-CEOs say.

“Grow’s vision is to enable businesses greater access to finance by being a ‘one-stop shop’ for all asset finance and working capital requirements. This includes asset finance, trade finance, invoice finance, floorplan finance, insurance premium finance and business loans,” says Woszczalski.

Mohnacheff says Liberty is a pioneer in the specialist lending space with almost 25 years’ experience.

“Liberty has developed innovative and efective processes designed to help brokers achieve better outcomes.

“Recognising that there is often more to a customer’s story than what is listed in their credit fi le, we assess each application on a case-by-case basis to ensure we get the full picture.”

Liberty also works with brokers to collect all the required information, and Mohnacheff says it’s one of the few lenders that provide direct access to the underwriting team.

“Our BDM team is highly regarded for its hands-on support, and with Liberty you know that there is always someone available to answer any questions you might have along the way.”

Demand for finance; loan trends

La Trobe Financial is confident brokers will receive a major boost on the back of the pandemic now and into the future.

“We know that where there is confusion and complexity there is opportunity, and that environment has always provided tailwinds for brokers. Similarly, these same tailwinds relating to complexity and confusion have always been supportive for NBFIs,” Bannister says.

Given that there are thousands of loan products in the market, consumers couldn’t be expected to navigate through them all, particularly in a fast-changing environment.

“Brokers can use their technology, knowledge and experience to distil these options quickly and appropriately to assist customers,” Bannister says.

“As a result, we expect to see broker share climbing above 70% plus, and we expect to see NBFI market share heading back to 10% and beyond.”

Saoud says specialist lending has become more relevant as customers such as business owners have faced challenging emotional and financial events over the past two years.

“People have had their businesses closed, their employment interrupted, cash flow reductions and savings patterns disrupted. This has brought a need for specialist lending to people that would not have considered it necessary in the past.”

In a shifting and volatile environment, there’s a greater appetite for specialist lending options, and this will continue to grow post-pandemic, says Saoud.

“More brokers are seeking the assistance of specialist lenders – from the growing self-employed market to people with different types of income, those recovering after a life event or building a property profile.

“To help us deliver great outcomes for our brokers and their customers, we’re making big investments in our digital capabilities and new products to better meet the needs of this category across the next 12 months,” Saoud says.

Mohnacheff says the economy has encountered significant hurdles over the last two years but has shown its resilience time and time again.

“While there have been major shifts across many industries, appetite for credit remains high, and the demand for specialist solutions remains strong.

“As a lender, we are closely monitoring these developments and continually looking for ways to better support the growing number of customers within this changing landscape. And, for brokers, experience in specialist lending is becoming an essential component of running a successful business.”

The days when a specialist loan was perceived as a second choice have long gone, Mohnacheff says. He expects that as more customers become aware of the advantages of this option, demand will continue to grow.

“Increasingly, we’re seeing first home buyers look to specialist loans to help them break into the property market, achieving outstanding results,” Mohnacheff  says. “Our flexible solutions allow buyers to reach their goals faster, which in some cases means they can start to take advantage of rapid market growth as they begin to accumulate equity.”

At Grow Finance, Woszczalski and Verschoor say specialist lending is constantly evolving to meet current and emerging demands for business finance. The pair say the following are some of the current trends.

  • high demand for asset finance (trucks, trailers and materials handling)
  • an increasing demand for debt financing to reduce cash fl ow pressure
  • businesses that have struggled or significantly changed operations opting to rapidly sell unwanted or underutilised assets – this correlates with increased demand for funding to purchase used assets, exacerbated by supply chain issues for new stock
  • businesses placing orders earlier and making larger orders to offset supply chain uncertainty and keep a comfortable buff er of stock on hand locally (new and existing ranges)
  • a sharp rise in demand for fit-outs to accommodate increased patronage as COVID restrictions ease and the ‘new normal’ is accepted

Helping clients through tough times

There’s no doubt the self-employed and business owners have struggled over the past two years, but specialist lenders are uniquely placed to understand their circumstances and assist them where possible.

Saoud says that in an interrupted economy historical financial statements may not reliably demonstrate the customer’s trading position or profitability and may fall short of meeting traditional full-doc criteria.

“Specialised lending for us tends to be more about the uniqueness of the transaction that may vary certain pivotal credit criteria, such as high LVR, non-standard sources of income, or transaction structure,” he says.

Pepper Money understands that unexpected life events can happen, so it looks at customers’ wider circumstances on a case-by-case basis to see if the borrower is in a position to service a loan.

“We don’t let the past or ‘rough times’ defi ne the customer’s future,” Saoud says.

Access to capital largely depends on whether the SME is a growth business that has hit a tough patch or is a business in decline.

“If it’s the former, we encourage businesses to collaborate with their broker and accountant to determine how much funding is required – and, most importantly, that it can be serviced with a clear exit plan without distressing or exposing the business,” says Verschoor.

Bannister says that in La Trobe Financial’s experience SME borrowers simply want three things. “Firstly, they want to be listened to – it’s likely in the current environment that an SME customer has been rejected by their trading bank because ‘the computer said no’, therefore they are seeking someone prepared to listen to their circumstance with an open mind.”

Borrowers want advice – often they are “confused and possibly a little dejected”, Bannister says. This is a great opportunity for brokers to showcase their value proposition of choice, advice and a fair go, guiding them through a short-term “life event”.

Lastly, the customer wants a suitable solution that satisfies their goals.

“Helping SME borrowers in need is good business,” Bannister says. “They will remember your help and may become lifelong clients who refer other business.”

Big potential for higher market share

The major banks’ focus on prime borrowers has enabled non-bank lenders to fill a gap in the market. MPA asked the non-bank lenders whether they expected the growth in specialist lending to continue.

Mohnacheff says non-banks have traditionally offered more flexible solutions and can generally cater to a more diverse pool of customer needs.

“Liberty’s credit policies have focused on flexibility since day one, and our decades of experience support us to deliver highly competitive options,” he says.

“The big banks typically don’t have the same experience or flexibility to off er highly tailored lending solutions to meet a much broader range of customer needs.”

As a specialist lender with solutions for home, car, business, personal, commercial and SMSF loans,  Mohnacheff  says Liberty’s depth of products is hard to match.

There are 2.4 million SMEs contributing $421bn to the economy – the sector is evolving and so are its needs, say the Grow Finance CEOs.

“Grow Finance will continue to extend or enhance products, launch new products and blend products to meet requirements for asset finance and working capital solutions.”

Key factors driving growth include the submetro greenbelt construction boom; the hybrid work-from-home model resulting in mass sea and tree changes and a big spike in home renovations; and ongoing supply–demand issues.

Another factor is the “post-lockdown” change in business confidence, boosting investment in business, such as through fi t-outs and equipment purchases, they add.

“Similarly, there’s a rise in mergers and acquisitions to bypass organic growth. Consequently, there’s a spike in demand for asset finance, invoice finance and trade finance facilities,” says Woszczalski.

Bannister points to the fact that major banks’ risk appetite and target customer profiles can change, and this can be seen right now in the persistent tightening of bank acceptance criteria due to their simplification strategies over the past three years.

“The major banks are pursuing a much narrower and specific segment of the market, being the prime vanilla home loan, a segment that can be scaled en masse, thanks to highly automated credit processes that require very little human intervention or oversight.”

The result, says Bannister, is that today’s ‘near prime’, ‘specialist’, ‘underserved’ and ‘overlooked’ borrowers would have been likely to fi t bank acceptance criteria of the past decade.

“We expect this focus [of the majors] will only intensify, and we are terrifically positioned along with the other major NBFIs to play one of the most important roles in the mortgage lending space over the next three years.”

Saoud says that, looking ahead, specialist lending will continue to provide solutions for borrowers who don’t meet mainstream lending criteria and require a lender that will consider their individual circumstances.

“As we navigate through another challenging year, a lender that can support customers by considering their current income and situation will be important to helping those businesses continue moving forward. More brokers – and in turn their customers – recognise the true value that non-bank lenders like Pepper Money can provide them.”

Benefits for brokers

Specialist lenders benefit businesses and brokers alike, says Verschoor.

“Specialist lenders enable business borrowers to quickly gain access to flexible and aligned funding to support growth or alleviate challenges. Similarly, specialist lenders extend brokers’ value proposition, help create ‘stickier’ clients and boost revenue,” he says.    

“We encourage brokers to let us know their SME clients’ needs, and we will work collaboratively to deliver the best possible outcome, whether it’s a single product or multiproduct structured solution. This model supports brokers of varying maturity in commercial finance.”

Bannister says La Trobe Financial has one of the broadest ranges in the market, covering first home buyers, upgraders, downsizers, the self-employed, those looking to build a home, and others wanting to build their retirement nest egg via an SMSF loan.

He says all these needs can be served by a specialist loan, depending on the borrower’s circumstances – whether they have variable income, or have had a change in employment or a minor credit impairment, or they are self-employed without up-to-date financials.

“This changing dynamic of a borrower’s circumstance throughout their life cycle provides the greatest example or proof point of the broker CVP – certainly more so than any vanilla automated home loan.”

Advantages for brokers include the opportunity to diversify revenue sources, expand business capabilities and protect their customer base  by creating ‘stickier’ clients, Bannister says.

He adds that by following responsible lending guidelines brokers are well equipped to complete near prime applications. “There is no difference between a broker’s approach to selling a prime loan and selling a specialist loan; the process is the same.”

Bannister says La Trobe Financial’s 200-strong credit team and its upcoming digital enhancements are here to make life easier for brokers and their clients’ needs.

At Liberty, Mohnacheff says brokers and their clients are provided with a wide range of loan solutions. “Not only does this equip brokers to support a more diverse customer base, but it also allows them to continue providing the kind of support customers need, should their financial situation change.

“We offer competitive loans to support customers in all kinds of circumstances. Even when supporting customers with complex credit histories, we make it easy to find suitable solutions that tick all the boxes.”

Mohnacheff says for each of its loan products Liberty has specialised BDMs, underwriters and support personnel available to brokers.

“Through Liberty IQ, we are also one of the few specialty lenders offering electronic support and delivery with real-time updates.”

Liberty’s highly experienced, award-winning BDM team is also available to walk brokers through the loan process and answer questions, Mohnacheff says.

“From a broker’s perspective, the process of writing a custom loan application is not significantly different to submitting a conventional loan.”

Saoud says brokers who educate themselves on specialist lenders such as Pepper Money will cope best with changes and ensure their business flourishes.

“The appeal of specialist lending is far broader than many brokers may realise … it’s not limited to people who have had a credit event. Investors, the self-employed and families, to name a few, are all potential borrowers who can benefit from a specialist lender,” he says.

“We also engage with brokers on declined deals and look for ways in which the use of a specialist product may allow an appropriate solution for the customer to obtain a loan for their objectives.”

Pepper Money’s industry-leading loan approval time of just one day can be a strong selling point for brokers and their customers, Saoud says. “Ultimately, by helping a customer navigate a complex and at times highly emotional journey, you will earn their trust and have an advocate for life.”

Saoud says the non-bank lender partners with aggregators and brokers to deliver best-in-class training and targeted education events to help brokers learn about specialist lending opportunities.

Brokers are also kept fully informed of the “what, when and why” of every interaction throughout the loan process.