How to beat the interest rate blues

The next couple of years are set to be a testing time for the mortgage broking industry, but this presents an opportunity for a new era of diversification to emerge

THE GREEK philosopher Heraclitus is credited with saying that the only constant in life is change. It's unlikely, but he could well have been referring to recent trends in the Australian commercial lending space. With global pandemics, lockdowns, closed borders, inflation, rising interest rates and unprecedented weather events, it pays to channel your inner Heraclitus sometimes.

Dean Koutsoumidis, founder and managing director of Equity-One, is also philosophical about the cycle of interest rate changes. “Like life, they happen,” says Koutsoumidis. “The important thing is for us to ensure communication is as good as possible, to ensure brokers know what to expect, to then in turn help their client.” He says no one can control where interest rates go, but it’s critical that borrowers know that their broker is available to talk though the options available. “Complex environments are best dealt with, as always, with simple conversations,” he says.

Liberty has its ‘Do More’ training program to help brokers, as well as tools to help track applications. “We know the biggest concern with commercial lending is turnaround times, so we created Liberty IQ to track the status of loan applications in real time,” says Mohnacheff. Grow has over 60 staff, offices in Sydney, Melbourne and Brisbane, and a BDM presence in all states to assist brokers in breaking into commercial products.

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“The product enables SMEs to redirect the deposit back into their business to smooth out working capital, support growth and offset continually increasing operational costs,” says Woszczalski. It’s an example of meeting demand for rapid access to a business-critical asset as the economy shifts into a new gear. Fifo Capital also sees rising interest rates as a tailwind. “In the current rising interest rate environment, commercial lending can provide alternative finance options, many of which are not impacted by rate rises,” says chief executive Wayne Morris. Fifo provides finance solutions to businesses, including invoice finance, trade finance, supply chain finance and business loans. Alternative commercial finance options are not affected by rate rises, meaning clients can plan confidently, knowing the associated costs will remain relatively steady, he says. In the current economy, risk factors such as supply chain issues and labour shortages are hurting business profitability but providing an opening for non-banks to ramp up commercial lending.

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Koutsoumidis says no one expects brokers to have a crystal ball, but even the slightest insight into what a lender’s expectations are in the short-term future will be very helpful for any customer. Equity-One caters to a range of brokers and is used to being leant on. “Whilst we deal with very experienced brokers who are well versed in the area of commercial lending, there are equally many that are either new to broking or simply don’t do many commercial loans as part of their business,” says Koutsoumidis. Nearly 30% of brokers also do commercial loans, but for a large proportion it is a complex area that only makes up a small proportion of their overall business. Equity-One walks brokers through all the stages of the transaction so they can engage confidently with their client or referral source. “We, in a sense, train our brokers by virtue of being available for them, case by case, loan by loan,” he says. “The reality is that they will tell us what they need, as opposed to us telling them what to do.”

As a leading Australian non-bank lender, Liberty offers innovative solutions at competitive prices to support customers with greater choice. Over the past 24 years, this free-thinking approach to loan solutions has seen more than 600,000 customers get finance across a wide range of home, car, personal and business loans, as well as SMSF lending and insurance products. Liberty remains the only non-bank lender with an investment-grade credit rating offering custom and prime solutions to help more people get finance.

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Since 2006, leading property lending specialist Thinktank has provided over $5bn of commercial, residential and SMSF lending solutions, which have enabled thousands of borrowers to achieve their goals of acquisition, refinance and equity release. As an independent lender, Thinktank has also established a respected track record in capital markets, having issued over $2.5bn in AAA-rated bonds to Australian and global institutional investors to date. It has also recently introduced two mortgage-secured investment fund options for Australian wholesale and sophisticated investors.

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“We anticipate that [improving supply chain problems] will correlate with an increase in demand for asset finance and working capital solutions that enable cash flow to be redirected into the business”

David Verschoor and Greg Woszczalski, Grow Finance

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“You can’t stop change,” says Liberty group sales manager John Mohnacheff. “You can only adapt and adjust.” The outlook for commercial lending is pregnant with potential to take advantage of the changing times, and non-bank lenders see the sector’s expansion as a key foil against any uncertainty that people may have about the future. “Nervousness surrounding the rate rises is understandable, and many recent new-to-industry brokers will not have worked in an environment with rising interest rates before,” says Mohnacheff. He says Liberty’s free-thinking approach lends itself well to times of flux because it allows the company to be more flexible. “We know broker businesses must constantly re-examine how to remain relevant,” he says.

“Complex environments are best dealt with, as always, with simple conversations”

Dean Koutsoumidis, Equity-One

Dean Koutsoumidis

Equity-One

John Mohnacheff

Liberty

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John Mohnacheff is Liberty's ebullient and charismatic group sales manager. With over 30 years of insurance, banking and finance experience, he is committed to improving the sales habits and disciplines of the entire group sales team. Before joining Liberty, Mohnacheff held executive roles at Westpac and Bank of Melbourne. He has a Bachelor of Business and a Master’s in Marketing from the University of New England, as well as a Postgraduate Diploma in Organisational Behaviour from the University of NSW.

Liberty

John Mohnacheff

David Verschoor and Greg Woszczalski are co-chief executives at Grow Finance (Grow). Verschoor is a seasoned finance professional with broad knowledge of risk management, regulatory compliance and trading. He has extensive experience in credit underwriting and policy formulation, as well as the provision of strategic advisory, and has held previous roles at Westpac and BNP Paribas. Woszczalski has worked for over 20 years across many business sectors, structuring and implementing cash flow solutions and consulting on company restructures. Prior to Grow, he was a board member of the Debtor and Invoice Finance Association, and co-founder and executive director at 180 Group.

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Thinktank general manager partnerships and distribution Peter Vala has extensive experience in residential, commercial and development finance. He specialises in strategic implementation, leads the Thinktank relationship manager team, and works closely with brokers and aggregators.

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Most recently, Grow has launched a Low Doc No Deposit Asset Finance product for Tier 1 assets such as cars, vans and utes. The new facility, designed for an economy in which ‘cash is king’, reflects the market need for a product that removes the burden of large upfront capital requirements often faced by non-asset-backed business operators when seeking motor vehicle finance.

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Source: AB

Business credit demand by sector, according to selected non-bank lenders

“You can’t stop change – you can only adapt and adjust”

John Mohnacheff, Liberty

Despite the nervousness, rising interest rates are not dampening demand at Grow Finance, say co-chief executives David Verschoor and Greg Woszczalski. Far from it. Grow is seeing consistent high demand for alternative working capital products to boost growth, particularly in asset finance, invoice finance and trade finance facilities, to offset supply chain disruption. “Grow’s point of difference is being a ‘one-stop shop’ for SMEs’ cash flow needs and its ability to respond to current and emerging market demand with sharply priced product enhancements, product extensions and new products,” says Verschoor.

“Rapidly rising operational expenses such as logistics, fuel and cost of raw materials are making it increasingly challenging for some businesses to trade sustainably,” says Peter Vala, general manager partnerships and distribution at Thinktank. He says brokers should review their clients’ existing financial arrangements to potentially restructure debt and their loan terms, especially if they are worried about dealing with upcoming annual reviews and revaluations. “If the property market softens, our solutions remove the risk and inconvenience of needing to revalue or produce additional security,“ says Vala. Thinktank’s maximum loan amount was recently lifted to $4m per security property, with terms of up to 30 years on a set-and-forget basis, and with no annual reviews, ongoing covenants or regular revaluation requirements. Opportunity knocks Liberty sees an opportunity at the crossroads between embracing new technology and reverting to post-pandemic normalcy. Mohnacheff points to growth in digital investment across all sectors and an increase in businesses securing their staff in a tighter job market as areas brokers should target with their strategy. “As we move towards a world where we need to balance the digital world with the real one, there’s an extensive list of commercial opportunities,” he says. “Everything from commercial warehousing to new vehicles to updating technology is essential to keep up with an ever-changing environment.”

But the tools are there to ride out the economic adjustment and return to a more normal monetary policy. Brokers have a key role in helping borrowers navigate these difficult times by reviewing their clients’ current financial commitments with a view to minimising monthly outgoings and freeing up cash to contend with rising costs. After all, finance providers wouldn’t offer such products if they didn’t think Australian businesses were up to the challenge. “We have confidence business has learnt the required skills to operate in this climate,” says Mohnacheff.

Grow Finance is a leading non-bank business lender with a vision to help companies thrive in today’s increasingly complex and competitive environment. It is a ‘one-stop shop’ for all asset finance and working capital requirements, including business loans as well as asset, trade, invoice, floor plan and insurance premium finance. Grow is agile, innovative and inspired by product fusions and redefining product classes. The company actively responds to market demand with sharply priced product enhancements, product extensions and new products. Its growth is sustained through continual platform enhancements and progressive team extension, as supported by a recent capital raise and new warehouse facility.

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Grow Finance

David Verschoor and Greg Woszczalski

Liberty

John Mohnacheff

Peter Vala

Thinktank

Peter Vala

Thinktank

Peter Vala

Dean Koutsoumidis

Equity-One

Wayne Morris

Fifo Capital

David Verschoor and Greg Woszczalski

Grow Finance

Dean Koutsoumidis is the founder and managing director of Equity-One. He specialised in financial planning in the early ’90s and then focused on non-bank lending before the introduction of the Managed Investments Act and the financial services regimes that followed. Equity-One’s recent engagement with Westlawn Finance and Consolidated Operations Group sets the groundwork for continued growth and value-adding opportunities for its SME clients.

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Dean Koutsoumidis

Wayne Morris, CEO of Fifo Capital, comes from an accounting and corporate finance specialist background, having worked at Grant Thornton in London, where he held a senior position in government advisory for corporate and business finance. He is known as one of Australia’s leading experts in supply chain finance (a form of payables finance), has provided insights to a Parliamentary Hearing (2021), and is regularly consulted by the Australian Financial Review on such matters. Morris is passionate about helping businesses grow by challenging them to look beyond ‘vanilla’ forms of finance and more towards finance solutions tailored for growth strategies.

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Koutsoumidis says the best opportunities will come to those brokers who can spend time having meaningful conversations with clients, as this adds “real value” to their relationships. “Ironically, it’s often not only money that clients want to talk about. It may be the reason for the call, but the conversation is deeper than that,” he says. Verschoor and Woszczalski say the best way to make the move into commercial is to start by identifying the non-PAYG customers in your current book and reaching out to them with information on commercial finance services to address common challenges such as enabling purchases of advance stock; sourcing working capital; or purchasing a vehicle without a large upfront payment.

While supply chain issues are currently driving commercial lending for capital-intensive businesses such as e-commerce, Grow expects many issues around supply to improve in the next six months. “We anticipate that this will correlate with an increase in demand for asset finance and working capital solutions that enable cash flow to be redirected into the business,” say Verschoor and Woszczalski. Non-banks are finding that demand for capital across the economy is still quite broad-based. Sectors in which credit demand is rising include tourism, hospitality, mergers and acquisitions, agribusiness, construction, import and wholesale trade, education, engineering, and professional services.

“Despite the mounting pressures in the market, we are still seeing credit demand staying surprisingly constant across all industry sectors, with some in growth cycles while others are rationalising,” says Thinktank’s Vala. Alternative lenders offer more opportunities to brokers in an uncertain market as they are often willing to overlook factors that trip up mainstream institutions.

Fifo Capital, for example, has no issue taking on clients with tax arrears, in contrast to the major financiers, which are trying to avoid such risks. A key growth area for Fifo currently is payables finance: working capital to pay suppliers. “Overseas markets have already adopted such finance options,” says Morris. This type of funding can be fast to set up, helping brokers get quick wins. Morris predicts such lending will expand over the next six months. “We expect to see payables finance solutions being adopted more and more, coupled with receivables or debtor finance to solve client funding requirements,” he says. In the current environment, Thinktank recommends reducing loan repayments to the lowest degree possible, typically via a competitive rate, or by extending loan terms or consolidating debt. “Significantly lowering monthly repayments may allow a business to continue to trade profitably where it may have been starting to struggle before,” says Vala.

Choosing a loan structure that allows accelerated loan repayments to be made without penalty is also a wise move to reduce the interest cost, he adds. The benefits to brokers who succeed in commercial are not small. “They can reach a wider range of customers and create strong and lasting relationships with existing clients and referral partners,” says Mohnacheff. “Business requirements are changing constantly, and being a broker who can help navigate a customer’s changing financial circumstances is a huge advantage.”

“Rapidly rising operational expenses, such as logistics, fuel and cost of raw materials, are making it increasingly challenging for some businesses to trade sustainably”

Peter Vala, Thinktank

Brokers who may have tried commercial before and decided it wasn’t for them should take another look as the area is fast-changing, says Morris. Brokers are sometimes “pleasantly surprised” by the options now available. “There have been many new and different innovations in the commercial finance space in recent years,” he says. Robust support for brokers Equity-One supports brokers in the commercial area by being available to provide answers quickly, says Koutsoumidis. Digital tools make the process faster today, but the underlying concept is unchanged since Equity-One opened for business in 1996. Its basic approach to lending in the commercial sector has also remained essentially the same over that time. The non-bank avoids construction loans but has continued to be relevant to its SME borrowers for purchases, refinancing and cashing out of residual stock.

Equity-One is a managed investment scheme specialising in commercial lending to SMEs and investment management for retail and wholesale investors. The company began operations in 1996 and became an MIS in 2006. To date, it has successfully procured and managed over $1.7bn in transactions.

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Source: Reserve Bank of Australia Bank Lending Classified by Sector – D5 data, July 2022

800

Jan 2021-2022

Feb 2021-2022

Mar 2021-2022

Apr 2021-2022

May 2021-2022

Jun 2021-2022

+7.0%

+7.9%

+8.3%

+9.9%

+11.2%

+11.8%

2021

2022

Year-on-year change

1200

1000

600

200

400

$1,017.6bn

$1,088.5bn

$1,097.6bn

$1,017.2bn

$1,117.7bn

$1,031.6bn

$1,027.6bn

$1,129.1bn

$1,026.6bn

$1,141.9bn

$1,038.8bn

$1,161.2bn

Year-on-year change in total value of commercial lending

Fifo Capital offers extensive, professional one-on-one as well as team support, and guidance with products and training where necessary, while Thinktank provides industry-leading education and training, from regular accreditation sessions for commercial and SMSF lending through to areas such as prospecting, opportunity conversion and continual existing client engagement. Heraclitus revisited It is only natural that change frequently breeds uncertainty, and 2022 has not been the easy and unshackled path that many dreamed of in the depths of the pandemic. “We are in the early stages of a storm that could easily build further,” says Vala.

“In the current rising interest rate environment, commercial lending can provide alternative finance options, many of which are not impacted by rate rises”

Wayne Morris, Fifo Capital

Launched in Australia in 2007, Fifo Capital is a leader in the commercial fintech space for innovative cash flow and working finance facilities, underwriting in excess of $2bn to over 3,000 businesses – with specialties in construction, manufacturing, engineering and importer/wholesalers, to name a few. Fifo Capital was recognised as a 2019 finalist for Lending Innovator of the Year at the Fintech Business Awards, and in 2020 was named Best Working Capital Solution Provider – Australia at the APAC Business Awards. In March 2021, Australian finance and investment house Wingate acquired an equity interest in Fifo Capital.

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Dean Koutsoumidis

Equity-One

Wayne Morris

Fifo Capital

Equity-One

Dean Koutsoumidis

Fifo Capital

Wayne Morris

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Wayne Morris

Fifo Capital

Equity-One

Dean Koutsoumidis

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Wayne Morris