Lending a hand to the self-employed

How alt-doc lending assists brokers and their clients

Lending a hand to the self-employed

All borrowers are facing challenges in the current lending environment. Higher interest rates mean that borrowing capacity has been reduced, and loan serviceability buffers can make it difficult for some people to refinance their home loans.

But these difficulties can seem even bigger for a particular customer cohort – the self-employed. This segment can include people who are sole contractors, small business owners and gig economy workers.

Not having the usual income patterns and accompanying paperwork that their PAYG counterparts are able to provide can put them at a disadvantage when seeking loans, especially from the major banks.

This is where non-bank lenders and alt-doc lending come in – non-banks specialise in helping borrowers such as the self-employed. They understand this growing customer segment and can work with brokers to assist clients who would benefit from alt-doc loans.

The self-employed made up 61% of Australia’s total employment base in 2023. That means there are millions of borrowers that brokers could be helping with their finance needs.

MPA asked Pepper Money general manager mortgages and commercial Barry Saoud (pictured above left) and Liberty chief distribution officer David Smith (pictured above right) to share their knowledge about alt-doc lending and the advantages for brokers and clients.

What does alt-doc lending cover?

Saoud says alt-doc loans have emerged as a beacon of hope for a niche yet significant segment of the market: the self-employed.

“These loans are designed to cater to the unique financial situations of entrepreneurs and business owners, contractors, seasonal workers and even property investors,” he says.

“These borrowers often have non-standard income streams or need financial solutions for business debt consolidation, outstanding tax payments or cash flow management.”

 Alt-doc loans are particularly suitable for self-employed individuals and investors who face challenges in providing proof of tradi-tional income, due to fluctuating income or irregular cash flow, says Saoud.

“Alt-doc loans allow them to provide alter-native income evidence, such as bank account statements or an accountant’s letter, to support their loan application.”

These loans can also accommodate borrowers with intricate financial arrange-ments such as those involving companies or trusts. Saoud says alternative income documents such as a six-month BAS (business activity statement) may be a more accurate reflection of their ability to service the loan.

“Brokers who understand the unique income structures of these individuals have an opportunity to reassure them that there are still options for them.”

Smith points out that all borrowers are unique when it comes to their income and financial records.

“Our alt-doc (AltA®, Nova and Express) solutions provide options for those who may not be able to – or prefer not to – satisfy traditional loan application requirements. Alt-doc loans cater for borrowers who are self-employed, contract or seasonal workers, or who may not have access to all the typical financial documents that lenders often ask for.”

Growth in the sector

Alt-doc lending is an important part of Liberty’s business, says Smith.

“Demand for alt-doc solutions has been consistent since COVID, and we are starting to see an uplift as small businesses look for flexible solutions to help manage their finances.”

He says small business is the backbone of Australia, but many small businesses are struggling.

“While inflation drives up expenses, increased cost of living is causing decreased consumer spending. And with cash flow and profitability concerns, we are seeing an increase in the need to support small businesses through alt-doc products.”

Liberty has always taken great pride in its close relationship with the broker channel and the accessibility of its BDMs and credit assessors, Smith says.

“With a dedicated local team, support is only a phone call away, and our teams thrive on working through scenarios with brokers to help them find a way to ‘yes’.”

Saoud says Pepper Money has seen a rising trend in alt-doc applications year-on-year. “We expect this trend to continue, driven by economic changes and the growing number of mainly self-employed individuals.

“Growth in the alt-doc lending space is also dependent on broker education and understanding of how lenders like us can help their customers who aren’t traditional PAYG Australians obtain a loan.”

Benefits for brokers

Alt-doc is no different to recommending a traditional loan, Saoud says. The basic requirements and lodgement process for brokers are virtually the same.

“It’s just that Pepper Money asks for a different type of supporting documentation in order to verify the customer’s income.”

Brokers offering alt-doc loans can expand their market to clients with non-traditional income and help them access flexible loans for debt consolidation or business cash flow management.

The clients that benefit from alt-doc lending are also a good target for cross-selling opportunities, particularly leasing, insurance and equipment finance products, says Saoud.

“Often they are much ‘stickier’ clients with more regular finance needs as their business needs regularly change. For brokers, they offer a chance to tap into a growing market segment and deliver solutions that align with the modern workforce’s financial realities.”

Smith says there is often a misconception that alt-doc or custom loans are more diffi-cult and time-consuming, but there’s little difference when it comes to submitting an application.

“There is plenty of help available for brokers new to this area, including our highly experienced Liberty BDM team who can help walk a broker through the process and equip them with the right skills.”

Liberty is committed to enhancing the knowledge and capabilities of brokers who are currently working with alt-doc borrowers and empower those yet to diversify into this area, he says. “With access to Liberty’s specialised training and support, brokers can discover new opportunities to provide tailored solu-tions and build their business.”

Value proposition

Smith says alt-doc lending requires a highly skilled team, “which we pride ourselves on”.

“Liberty has an operations and BDM team willing to get on the phone and talk through individual customers’ situations. We listen, understand and strive for the best customer outcomes,” Smith says.

“Our bespoke systems allow us the fl exi-bility to treat every customer based on their circumstances. Brokers look to Liberty for our ability to accept a range of income types, consider non-genuine savings and look beneath the surface with each application assessment.”

Saoud says Pepper Money has three options to verify income within its alt-doc range: an accountant’s letter, six months’ BAS, or six months’ business bank statements.

“We recently raised the acceptable loan limit on our accountant letter to $2.5 million, in addition to o. ering single verifi cation of income across all of our alt-doc options, from prime through to specialist.”

Pepper Money’s ongoing investment in technology has created a smooth process, says Saoud, including fast turnaround times, digital verifi cation of identity and digital documentation, with the Pepper Product Selector providing quotes for customers in a matter of minutes.

Saoud says the cascading credit model provides a broad range of solutions to meet the ever-changing needs of the self-employed customer. Features include unlimited debt consolidation, including refi nance of tax debt, cash-out for business use, 40-year loan terms, and options for customers who may have previously experi-enced a life event resulting in adverse credit listings such as defaults or judgements, bankruptcy or arrears.

Looking ahead

Saoud says about a third of Pepper Money customers have used alt-doc.

“We see a massive opportunity to help [mainly] self-employed customers and their families get into homes and have better deals by allowing alternative documentation.

“We anticipate that the alt-doc lending market will continue to rise due to the changing economic circumstances and the growing self-employed segment wishing to utilise documentation that reflects their current fi nancial position and income profile.”

How often do you use alt-doc loans with your clients? Comment below.