Small businesses lack finance options
More recently, this situation has worsened as a result of The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which has led banks to tighten lending to small businesses. In addition, falling housing prices have led banks to look more closely at securing business loans with residential property.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell recently highlighted the lack of small business finance in an interview with TheAdviser, stating, “Lending in the SME space is actually declining when it comes to the banks. And it is declining because the major banks – over the last 18 months or so – have really clamped down on lending to small businesses where there isn’t significant equity on property. So, if a small business doesn’t have significant equity in property, then the capacity to get a loan from a bank is very low, really.”
Fintech lenders rise to serve the finance needs of small businesses
Fintech lenders, such as Moula, have stepped in to fill the gap by offering unsecured finance options to small businesses. By meeting an important need, fintechs have experienced phenomenal growth. Beginning in 2013, $10 million in alternative balance sheet loans were originated by fintech lenders. By 2017, this had increased to $398 million, which represents a compounded annual growth rate (CAGR) of 79%. At this rate, it’s estimated that this number will grow to $2,231 million by 2020.
In addition to catering to small businesses, fintechs have simplified the application process. Instead of requiring large amounts of paperwork, the application process is fast and easy. With Moula, for example, the online application can be completed within 10 minutes. Bank account and accounting data are safely and securely analysed online to make a lending decision.
This growing avenue of small business lending has created opportunities for finance brokers looking to diversify in a fast-changing environment.
Diversification to protect against proposed remuneration changes for mortgage brokers
The implementation of the Hayne Royal Commission recommendations concerning mortgage broker remuneration will depend on which party wins the Federal election on 18 May 2019.
The original Labor position was to adopt the Royal Commission recommendations to implement a fee-for-service model and get rid of trail commissions. As of early April, Labor’s proposal was for lenders to pay brokers a standardised upfront commission as a percentage of the loan amount, and the party has suggested that commissions be capped at 1.1%. In addition, Labor would limit clawbacks to two years, ban trial commissions for new loans as of 1 July 2020, and implement a best interest duty obligation towards customers.
The Coalition changed its original position of supporting the Royal Commission’s recommendations. Its position now includes making mortgage brokers legally comply with a new best interest duty obligation towards customers and requiring that the value of upfront commissions be linked to the amount drawn down by borrowers, not the total facility available. In addition, there would be a ban on campaign-based and volume-based commissions. In three years, the Coalition would have regulators review both upfront and trailing commissions.
For mortgage brokers, diversifying into unsecured business lending can protect against future mortgage broker remuneration changes and decrease reliance on trail commissions and contract renewals.
Leverage your contacts and add value
Diversifying into small business lending is easier than you think. If you are have been specialising in mortgage lending, a significant percentage of your clients will have a need for business finance. Research shows that 25% of mortgage borrowers own small businesses or are self-employed. More and more, consumers are looking for a single source to meet all their finance needs. This creates an opportunity for you to broaden your services and assist many of your existing clients. By widening your services and becoming a multifaceted lending expert, you can build stronger relationships and make a more meaningful contribution throughout the customer’s journey.
If you don’t offer business lending to clients who need it, they could go elsewhere and eventually switch their mortgage lending as well. So why not leverage the relationships you have with existing clients by offering unsecured business lending?
Diversify to protect against economic changes
Relying on one form of finance broking could leave you exposed if market conditions change. For example, if demand for mortgage lending decreases, offering other products will lessen your exposure to market changes. The numbers show that unsecured small business lending from fintechs will continue to grow into the future. By diversifying into this area, you can ride the growing trend to boost your business.
Diversification makes sense
If you were investing in shares, it wouldn’t be wise to purchase shares in only one sector. The same applies to finance broking. Relying on one type of lending can be risky if underlying factors change and demand declines. The continued growth of unsecured business lending from fintechs provides an opportunity for finance brokers to diversity and boost their value to existing clients.
Are you ready to meet the growing demand unsecured small business lending?
Find out more about partnering with Moula.