Back in business

Four business and commercial lenders tell Australian Broker about the unique solutions they have pioneered in the market

When it comes to self-managed super funds, one area that is often overlooked is limited recourse borrowing arrangements (LRBAs).

Often mentioned in analysis of SMSF investment portfolios is the growth in LRBAs over recent years – from a modest $2.5bn in June 2012 to $31.4bn as at December 2017.

A number of years ago, Thinktank identified an emerging need in the commercial lending market for LRBAs to be used by SMSFs looking to purchase property or refinance existing commercial SMSF loans.

“The rate of growth in LRBAs attracted attention in the Murray Financial System Inquiry, yet it largely set to one side the small percentage that it represents of total assets. These LRBAs are secured mostly by direct property, both residential and commercial, and, of these assets, it represents just 19.2%,” says Peter Vala, head of sales and distribution at Thinktank.

“It is widely expected that this number will continue to grow in large part as a result of the attraction of tax-effective, long-term owner-occupied investment in ‘business real property’. The potential advantages of such an investment for retirement planning are significant in the current low-growth environment,” Vala says.

Accordingly, Thinktank believes the greatest area of growth is in the commercial property asset class, with owner-occupiers looking at long-term investment strategies and securing tenure through indirect ownership. While lenders report an extremely low rate of arrears due to the strong performance of these loans, the protection provided to borrowers if things do go wrong is considerable as the equity acquired in owner-occupied premises is protected from creditors and/or administrators.

A number of financial institutions have recently withdrawn from providing financial accommodation under LRBAs. However, Thinktank not only remains active in this area but, after three years in the commercial SMSF loan space, has market-leading products, services and expertise to support the financing objectives of brokers and their clients.

Thinktank also provides educational support to brokers, conducting regular SMSF training sessions in collaboration with major aggregator groups.

“For those that have compliant LRBAs secured by business freehold assets and believe that their lender may not be motivated to continue their current facilities, the option remains open to refinance existing facilities, including the cost of the exercise,” Vala explains.

“The cash flow shock from rolling over from an interest-only to a short-term P&I facility, or reduced concessional contributions, can be substantially alleviated by extending the loan term. Some lenders will provide up to 30 years to amortise a loan facility, thus reducing monthly repayments and allowing the fund to build a higher level of liquidity for further investments.”

Set and forget

Commercial lending activity increased 7.2% in seasonally adjusted terms between May and June this year, but the mainstream banks’ appetite for commercial business remains subdued. Further, investors holding commercial security can face long approval times and extensive document verification requirements when seeking new finance.

Recognising these barriers, five years ago La Trobe Financial set out to tackle the challenges borrowers face by introducing the commercial Lease Doc loan, a facility that offers fast approvals and can be used for purchase, refinance and debt consolidation.

As an added bonus, La Trobe Financial has since eliminated annual reviews of its commercial loan facilities, allowing investors to ‘set and forget’. This means borrowers are not required to send updated information in order to meet ongoing performance metrics.

Steve Lawrence, VP head of major commercial clients at La Trobe Financial, says, “We are receiving strong demand for this product as borrowers look to exit lenders with ongoing performance hurdles, in order to achieve certainty of their funding future.”

In response to the “very strong performance” reported by Lawrence, La Trobe Financial recently reduced its commercial Lease Doc interest rates. “Therefore, we expect to see a significant uplift in activity in the coming 12 months,” Lawrence says.

The practical advantages continue. In November 2016, the unfair contract term provisions in the ACL and ASIC Act were extended to cover the terms of standard-form contracts for small businesses.

“ASIC conducted a review of contracts offered by banks and found that in some cases the contracts potentially breached the unfair term provisions in part because they included financial indicator covenants that could trigger an event of default based on items that do not represent a material credit risk to the lender,” Lawrence says. “This is where a set-and-forget approach appeals to borrowers, and we expect this to be a driver of business for us.”

Supporting brokers by offering the Lease Doc product as a solution for their clients, La Trobe Financial provides direct access to its credit-skilled senior manager client partnerships as well as its credit analysts, who can assist at any point in the application process.

Lawrence says, “We are experiencing great success with our broker engagement strategy where we demonstrate to brokers personally, through tailored presentations, the capability of our broad product suite, which incorporates our easy-to-use commercial products.”

Loaded, not locked

Short-term commercial loans are expensive, but for those who need a funding boost every cent counts.

Meeting the market’s demands, Equity One provides interest-only loans for commercial borrowers, with payment terms of one to two years and the ability to pay back early without penalty.

“The real hero of our loans is the fact they provide a solution for commercial borrowers who aren’t being accommodated right now, without them being locked in,” says Equity One managing director Dean Koutsoumidis.

“More importantly, if somebody wants a commercial loan with only a 90-day term, unfortunately they are looking at the market’s more expensive short-term solutions. This option gives the comfort of a 12- or 24-month solution with the appropriate pricing and the benefit of getting out without paying short-term premiums.”

What’s more, the single-loan structure is available across all Equity One transactions.

Ensuring that borrowers are loaded with cash rather than locked into prohibitive terms, the loans can be leveraged in a number of ways. From helping to improve financial fitness before returning to a mainstream bank, to simply providing a cash boost, Equity One’s solutions keep things deliberately simple.

“That’s a really important part. Even though someone may think that a 12-month term is fine, if they can get their ducks in a row and go back to a mainstream institution, that’s the ideal situation, and we understand that. So if their loan is 12 months fixed, they can break it early after three months with no interest break-off. That’s an important feature of the product,” Koutsoumidis says.

The lender has been providing such loans for more than a decade and today can offer a maximum of $7m. The growing popularity of the products has seen multiple broker groups secure funding for their clients, and more of those borrowers are located outside of Equity One’s native market of Victoria.

“With the growth of our investor pool we have been able to do more diverse loan applications not only for Melbourne, where we originate from, but all up the east coast and in all capital cities,” Koutsoumidis says.

As Australia awaits the royal commission’s final report, some are hopeful its clarifications will reverse the trends that have recently caused lending conditions to tighten. However, Koutsoumidis isn’t so confident. He predicts current trends will actually pave the way for unscrupulous lenders to further squeeze commercial borrowers, exacerbating the problem.

“I can’t see in the short- to medium-term horizon that the majors will free up their credit policy; in fact probably the opposite. Whilst things are getting a little tougher out there on the major side of things, we will see a proliferation of smaller lenders, and the challenge is to find the one that suits the client while avoiding some of the more opportunistic lenders out there,” Koutsoumidis says.

Reporting that loan book growth has exceeded expectations for the last two years, Equity One is now looking to increase its reach beyond its primary market. There is “great opportunity” in Sydney and Adelaide and potential to add Perth to the mix, Koutsoumidis says.

Anticipating a minimum 30% rise in the number of Equity One loans over the next 12 months, he says, “We simply encourage introducers to contact us, and we work one on one with the brokers to go over the product. A lot of scenarios have their own nuances, so if they want to go over a scenario with us, they can call us, workshop it, and just build relationships from there.”

Up and away

Sometimes businesses need capital for the basics. Research conducted by NAB shows that 73% of SMEs in Australia feel successful and 44% plan to expand over the next three years. To do so they need cash, and the majority of small and micro businesses don’t have major assets to secure lending against.

General manager of NAB commercial broker Chris Thomas says, “Australian small business owners want support, guidance and access to capital, but some face challenges in doing so. One reason for this is the challenge some SMEs face in being able to provide sufficient tangible security for a loan.”

To help business owners overcome these challenges NAB introduced QuickBiz, offering unsecured business finance of up to $100,000 to small business clients. The QuickBiz product suite also includes an overdraft facility of up to $50,000, which is tied to a business transaction account to provide flexibility in managing cash flow and unexpected costs.

QuickBiz was an instant success with the retail channel, accounting for more than one third of the bank’s new small business loans. Building on that, QuickBiz was launched to the broker channel in May 2018 to “overwhelmingly positive” feedback. It is supported by ApplyOnline for small business lending, which enables brokers to lodge both small business and residential loans online together on one form through their aggregator software.

“We have great aspirations for the product going forward,” Thomas says. “What I’m hearing from brokers is that NAB QuickBiz has given them the ability to offer small business customers a quality, competitively priced lending product. For many, it’s a product they can be confident in recommending to long-time customers.”

While far from the only SME loan product on the market, QuickBiz has several unique selling points for borrowers, including loan terms of up to three years and a competitive fixed interest rate of 12.95% per annum.

For brokers, ApplyOnline fully digitises the application process, and a suite of learning resources is available to help build confidence for those brokers who are new to business lending. A team of 60 support staff, as well as office-based BDMs and a broker response centre staffed by skilled reps, are available to assist with everything from loan queries to technical support.

“At its core, by providing NAB QuickBiz to the broker channel, brokers can assist small business customers in accessing an unsecured loan, often as part of a broader financing relationship with that customer,” Thomas says. “As most brokers will understand, long-term relationships with customers win out over taking a transactional approach every time.”

Further boosting confidence, NAB’s ‘How’s business?’ campaign provides resources and prompts for brokers to maximise positive outcomes. Resources include a pre-qualifying tool, a guide to customer conversations, and an overview of NAB’s simplified credit criteria.

Thomas says, “As Australia’s leading business bank, NAB is continuously investing in smart technology, and we remain focused on supporting brokers to deliver the best for customers. Our research shows that around a quarter of a broker’s residential customers are also business owners, and with our new online lodgement capability we’re giving brokers the opportunity to extend customer conversations and meet a broader range of customer financing needs.”