According to Altus Financial, cash flow and profitability are among the top challenges small businesses face. These challenges are further magnified considering the lasting effects of the pandemic that began in 2020.
Now that the worst of COVID seems to have passed and restrictions have eased, SMEs in 2022 are now looking to grow and expand. In fact, a mid-year report from Judo Bank showed that one in two SMEs are in their growth/expansion phase, with one in two looking to access new funding in the last six months.
This demand for funding presents mortgage brokers willing to diversify in the commercial space an excellent opportunity for boosting their commissions.
Despite this trend for small and medium enterprises, only a fraction of the mortgage broker industry caters to commercial needs (around 5.3% according to the IBIS World Industry Report K6411b Mortgage Brokers in Australia).
Brokers who can diversify quickly into the commercial space can capitalise on this untapped segment with little competition for those that get in the game early.
Granted, the next question is how realistic is it to diversify into commercial lending?
One interesting, yet mostly overlooked statistic, is that 30% of the clientele of residential mortgage brokers are also small business owners. And these small business owners will need financing for their business from time to time.
From a customer standpoint, it’s far more convenient for the borrower if the broker who helped them find financing for their home could also help them find financing for their business. Many residential brokers believe they are unable to do so because business needs can be very different from what they’re looking for when buying a residential property.
Moreover, banks have incredibly strict guidelines, often requiring serviceability, which can be problematic especially if a business makes most of its profit in certain seasons.
If the business owner is a property developer, some banks might even require pre-sales before approving a loan. Of course, banks will favour pre-sales because that would mean the borrower is already making money upfront, which allows them to meet payment obligations early.
However, pre-sales often means the property developer will need to sell at a lower price point. Some property developers might want to benefit from the additional revenue when selling fully built units to prospective buyers. But, the requirements of bank finance limit their options to do so.
Benefits of Working with a Private Lender
Due to the additional challenges businesses face when applying for a bank loan, many mortgage brokers tend to shift their focus away from commercial loans. But for mortgage brokers interested in expanding their revenue streams, working with a private lender can help solve many of these problems.
Unlike traditional bank loans, private lenders are more flexible with their terms. For example, in Private Mortgages Australia, our emphasis is on creating terms around an exit strategy, as opposed to a bank that focuses on serviceability.
In addition, private lenders typically have a faster application process. For businesses needing quick finance to cover unexpected costs or to take advantage of a great opportunity, a quick application and approval process is crucial.
Private Lenders are able to provide much shorter loan terms. So while a private loan comes with a higher interest than what a typical bank loan provides (which is usually why people are hesitant to take out a private loan), the much shorter loan term means businesses spend much less on actual interest costs compared to the total interest they get when they take a long term bank loan.
Even for those who specialise in residential loans, working with a private lender can allow brokers to immediately diversify into commercial lending. In the case of Private Mortgages Australia, we have a referral program where brokers can earn a commission for referring business clients. Brokers won’t need to become private lending experts to be able to help clients with business needs.
The great thing is that most residential brokers are more than likely to have clients who are already business owners looking for business finance. By simply asking your existing clients, you can start increasing lending opportunities for your clients.
Moreover, working with a private lender can allow brokers to present more finance options to their clients, helping them to choose the best option that suits their needs. So not only do brokers get the chance to increase revenue opportunities, they get to serve their clients better, so it’s essentially a win-win situation.