Diversifying into SME Lending
Currently, the word on everyone’s lips in the Finance and Lending industry is diversification. Non-bank providers and the new breed of online lenders, fuelled by the 2018 Royal Commission findings and discussions, are certainly encouraging brokers to embrace SME lending. Even the big four banks are slowly ratcheting up their offerings and product lines for SMEs.
The question becomes, is branching into the SME lending space an appropriate decision for a professional finance and lending operation?
Businesses, in general, diversify for a number of reasons. The most basic of these is survival. By definition, a professional firm that focuses on a narrow range of services will only have access to a finite number of clients. That’s fine if the market is big enough to support you and your competitors. However, if the client pool is small, or if situational changes put a drain on that pool, the market will not be able to support all the service providers. In these circumstances, diversification into new services may be essential to the long-term viability of the business.
It is important to consider situational changes – the economic, social, cultural and political landscape that alter the environment finance and lending professionals work in. Research and lead indicators can assist in these considerations.
Some Recent Research
Specifically, in reference to a SME lender’s study and recent experiences with business lending, the following points are noted:-
23 per cent of SMEs have been knocked back by their bank (rising to 37 per cent if they have been in operation for less than five years)
SMEs have been turning to family members, friends, or relying on their credit cards to help support their businesses.
30 per cent of SMEs that have applied for bank finance believe they were negatively impacted by it, with the main impact being a slowdown in the business activities (57 per cent).
Lengthy approval processes also led to businesses delays. Cited were:- delivery of products or services (40 per cent); delaying debt payments (40 per cent); putting off buying new equipment (39 per cent) and hiring new staff (12 per cent).
25 per cent of SMEs are looking to seek additional business finance in the future, a figure that rises to 39 per cent for SMEs with six to 10 employees, and 56 per cent for those with 11-49 employees.
22 per cent of SME owners would consider an online lender, with the level of interest in online lenders rising to 42 per cent for SMEs that have previously had an application for finance rejected by a bank.
This research would suggest that large numbers of Australians SMEs may not be reaching their full potential due to the fact they cannot secure bank finance or because lengthy lending processes are adding inefficiency and monetary burden.
Meeting the Need
There is undoubted demand for finance among SMEs with the prospect of this demand increasing. This creates an opportunity for mortgage brokers to expand into SME lending and diversify their business service offering and operations. Helping SMEs access the finance they need is important for the small business community and the economy in general.
Lessons from the United States
After the GFC, the United States saw mortgage lenders exiting the market and brokers forced to find other sources of income to keep their businesses viable. The commercial sector was a seemingly obvious choice, and a flood of lending professionals moved into this space.
US commercial lending providers subsequently made a number of observations and comments on the transition from traditional mortgage broking into SME lending.
Education is key – Residential mortgages were something that everyone knew about, but small business lending was relatively new by comparison. The brokers that succeeded in the transition undertook knowledge training, understood the underwriting guidelines and put in the work to really know the product categories.
Some brokers assumed it would be easy and underestimated the difference between residential loans, traditional commercial finance and SME lending. Those that prospered respected the differences.
The processes are different in the SME lending space, and this takes time and energy to integrate into a professional lending business. However, the time frame on doing a transaction can be short, and brokers can get very comfortable with the process after two or three loans.
Those brokers that did successfully transition began to recognise a key difference with SME lending was that as a residential mortgage broker they might write one mortgage to a client every 10 years, while in the SME space a client might need a loan every year to buy stock, as an example. They had reason to be in contact with their client base more often and consequently had more transactions with SME clients.
Finance professionals may be nervous about what the future means for them from an income perspective; however, it is estimated that typically a quarter of a brokers’ book includes SMEs. Working with SMEs can offer a new service and produce a new income stream.
In conjunction with industry experts, elevateB has developed a self-paced, online, interactive Business Finance Certification. This program will provide you with the knowledge and skills required to become a successful business finance broker and work in the SME space. In addition, it provides business strategies and soft skills to assist you to better market and deliver your existing and new-found client offerings.
For more information on the Business Finance Certification, click here.