Bridging the SME Finance Gap When the Banks Say “No”

In this article, we will explore the latest statistics on the SME finance gap and discuss how mortgage brokers can play a pivotal role in providing solutions for SME clients.

The SME finance gap in Australia

A report by the Reserve Bank of Australia (RBA) cited survey results showing that half of SMEs have faced difficulties when trying to obtain funding, most notably with the time taken to process applications. In that same survey, panelists have mentioned that access to bank finance is becoming more difficult.

SMEs face constraints in obtaining traditional bank loans due to stringent lending criteria and risk aversion among financial institutions, which has been magnified by the current economic climate such as growing uncertainties, changing market dynamics, and the aftermath of global events such as the pandemic and the recent brewing conflicts abroad.

Many SMEs find it challenging to meet the traditional criteria set by banks, leading to a growing need for alternative financing solutions.

The role of Mortgage Brokers

Mortgage brokers can act as intermediaries in bridging the SME finance gap. Traditionally associated with home loans, more and more mortgage brokers have expanded their services to include commercial and SME financing to capitalise on the growing demand for business finance.

Mortgage brokers with an extensive network of lenders are at a significant advantage in helping match SMEs with appropriate financing options. By working closely with business owners, brokers can assess the specific needs and financial requirements of each SME, which is crucial when preparing loan applications.

Additionally, mortgage brokers can guide SMEs through various financing options outside of traditional finance institutions like banks. If a business owner is unable to meet the rigid serviceability criteria, or if they have an urgent funding need and can’t wait for the standard loan application process, then brokers can help these business owners find alternative finance solutions within their deadline.

Why consider alternative lending?

Unlike traditional finance institutions, private lenders consider different factors other than serviceability to qualify borrowers applying for a business loan. And because many private lenders don’t focus on serviceability requirements, the loan application process tends to be much faster than traditional banks that require proof that a business can pay monthly obligations.

Traditional institutions also tend to lock-in borrowers into longer-term loans. There are times when a business only needs to cover an immediate expense and might not want to be locked-in a long-term loan. Private lenders, on the other hand, can offer loan terms that range from 1 month to several years.

So while a traditional lender usually offers lower interest rates, it’s not uncommon for borrowers to accumulate higher interest costs over the course of the loan compared to a private lender that has a much shorter loan term.

Understanding the unique needs of a commercial client is important when identifying if a bank loan or a private business loan is the best option for them. And more importantly, if a bank turns down a client for not meeting their requirements, knowing that there are always alternative solutions to explore is of benefit to you and your client.

How can brokers expand their network of lenders?

For residential brokers contemplating on expanding to commercial lending, the main challenge is how to begin. How can they build their network of lenders? Are they sure they can present sufficient finance options to their commercial clients? Doesn’t it take time to learn about commercial lending? And if so, how long will it take before a residential broker can even profit from commercial lending?

The first and perhaps the easiest step towards diversifying into commercial lending is to partner with private lenders that specialise in commercial loans. In addition, working with private lenders can help brokers familiarise themselves with the various loan solutions available to different business needs.

In the case of Private Mortgages Australia, we offer a referral program for brokers. PMA works closely with brokers and their clients to understand their unique financing needs to develop a tailored solution. If a loan is settled successfully, the referring broker receives a commission.

Moreover, PMA is channel agnostic. This means that if a referred client comes to PMA directly for a new loan, the original referring broker will still get a commission for that new loan.

Therefore, a broker who becomes a referral partner with PMA can enjoy repeated commissions from previously referred SME clients.

Referring clients is a great way for brokers to immediately diversify into the commercial space and increase their income even if they’re just starting out. PMA’s relationships team will gladly assist both brokers and their clients every step of the way.

In essence, residential brokers can start earning from commercial lending while they take the necessary steps to broaden their knowledge on the commercial environment, understanding of business needs, and the different loan products provided by traditional and alternative finance solutions.

For a more in-depth look on how mortgage brokers can diversify to commercial lending, you may access our article “5 Tips on How Brokers Can Diversify Into Commercial Lending”.

If you are a broker and want to learn more about PMA’s referral program, visit our referrer’s page.

If you have a business lending scenario you would like to discuss, or, if you have queries on any of PMA’s commercial finance products, feel free to contact us or you can complete our Quick App form here (< 10 mins).