Bank and brokerage discuss strategies and solutions
For brokers wanting to add another arrow to their quiver, the commercial finance sector holds many opportunities to add value, NAB says.
But while there are plenty of reasons for brokers to diversify into commercial lending, Jean-Pierre Gortan (pictured above right), the managing director of commercial finance brokerage Simplicity Loans and Advisory and Marketplace Finance, says that formal training, accreditation, mentoring and controls are needed to ensure optimal customer outcomes are provided.
According to research undertaken by NAB, Australian businesses have been resilient to economic headwinds, and many are looking to expand and take opportunities as they arise.
An NAB monthly business survey for January showed trading conditions, business profitability and employment had strengthened. Business confidence was up 6 points to +6 index points, which NAB executive for commercial broker and equipment finance Chris Thomas (pictured above left) said was close to the long-term average.
Thomas said confidence had improved and businesses were keen to transact.
But uncertainty is still apparent within some industries and business owners across the board are making prudent choices and reviewing decisions carefully, he said.
“In this environment, commercial brokers are continuing to be trusted advisors to Australian businesses, supporting business owners to understand and navigate challenges in the market,” Thomas said.
He outlined five opportunities for brokers to add value in commercial lending in 2023.
1. Understand the operating environment
While businesses operating in government infrastructure, logistics and mining were flourishing, Thomas said that those in areas such as hospitality and retail were more challenged.
“Understanding the context in which businesses are operating helps brokers to form deeper relationships with their customers and provide solutions better tailored to their customers’ needs,” Thomas said.
2. Guidance on funding options
Irrespective of whether a business was thriving in the current climate or looking for ways to adapt, Thomas said the overall appetite for investment remained strong.
He referred to an ABS Capital Expenditure Survey for the September quarter, which showed businesses intended to invest more in the 2022-23 financial year than in the 2021-22 financial year.
When responding to a market environment, Thomas acknowledged that businesses had many options, such as expanding into new markets product lines, raising prices, or cutting costs.
“Brokers will be critical to guiding business owners to identify the most appropriate funding solutions to get the best outcomes for their businesses,” Thomas said.
3. Identify alternative solutions
Residential property market trends have a flow on effect for business owners, Thomas said.
According to CoreLogic’s Monthly Housing Chart Pack for March, housing values were down 7.9% over the year to February, the largest annual decline on record, but noted that the monthly pace of decline had slowed to -0.1%.
Changes in the housing market mean that business owners are more reluctant to put personal assets such as their family home as security for business loans, meaning specialist advice from commercial brokers is “invaluable” in the current environment, he said.
“There is a greater diversity of options available today that allow businesses to unlock the value of their balance sheets. For example, NAB’s invoice finance allows business customers to access finance to purchase stock or materials using unpaid invoices, rather than residential property, as security,” Thomas said.
“Brokers also have opportunities to assist business owners with refinancing their home loans, as well as commercial finance solutions.”
4. Support business sustainability
According to Thomas, helping business customers to reduce their carbon footprints and capture the economic and environmental benefits was another opportunity for brokers.
A NAB survey conducted in late 2022 found 43% of businesses either already had or planned to develop a net zero carbon emissions plan, up from 30% in 2021.
Solutions such as NAB’s green equipment finance offer could help business owners adapt to the changing economic environment, while making long-term investments into a more sustainable future, he said. It allows customers to invest in energy efficient equipment and is one of the ways the bank is actioning its own climate transition growth strategy, he said.
“We’re seeing increasing innovation and strong demand for equipment financing as farmers move to future proof their businesses through automation – particularly with some industries facing labour shortages,” Thomas said.
5. Stay connected with current trends
While strong business conditions were evident at the start of 2023, Thomas said many businesses had not experienced high inflation and rising interest rates amid a tight labour market.
NAB research showed that while supply chain pressures have eased and businesses are taking control of their supply chains by bringing operations onshore and seeking local suppliers, a quarter of businesses still predict supply chains will remain a significant issue for the next year.
Business customers need to have confidence that finance will be available to them whatever may come their way, Thomas said.
“They rely on their commercial brokers as trusted advisers to stay connected with the trends and opportunities, and to offer them choices to keep their businesses thriving and growing,” Thomas said.
Gortan said that becoming a finance broker meant brokers could offer more than one product and provide a more holistic service to their clients.
As new residential lending volumes are shrinking, the case for diversification remains strong. While MFAA figures show that brokers’ share of residential lending remains close to 70%, volumes over the December quarter were down by around 6.34%, Gortan said.
Lenders are encouraging brokers to offer commercial lending as a service, but what is often overlooked is the provision of tools and training to equip brokers to serve in their clients’ best interests, he said.
“An inexperienced broker has a low breadth of knowledge around products and lenders, which can result in the inability to spot issues with transactions, structures, and loans, especially from some predatory private lenders,” Gortan said.
For inexperienced brokers, slow response times translates to low volumes, which combined with a shallow pool of lenders can lead to suboptimal outcomes, he said.
Gortan said brokers diversifying into commercial finance should be given relevant tools and training to support them to ensure they maintain a high standard of service and ethical conduct.
Separate accreditation needed
Gortan recommends that brokers are properly equipped to offer commercial lending, by way of a separate commercial accreditation process with lenders, a robust training regime or pathway and ongoing mentoring. Controls around the types of lending inexperienced commercial brokers can take on while they learn is also important, he said.
Brokers currently write approximately 15% to 20% of commercial loans, and close to 70% of residential loans, he said.
“There is a future where brokers should be able to participate in a much higher volume of commercial loans as they do in residential loans which would provide clients the same benefits as they do in the residential sector,” Gortan said.
“However, this growth must be controlled to ensure the client experience and outcome remain in line with their best interests and don't lead to poor outcomes.”
Gortan said it was also important that the industry officially recognise commercial broking as a profession, a program led by the Commercial and Asset Finance Brokers of Australia (CAFBA).
“With proper support, residential brokers can become successful commercial lenders and contribute to the industry's growth and success,” Gortan said.