Most people understand the value of a finance broker in the context of residential loans. Recent statistics published by MFAA tell us that brokers are introducing 47.3% of all new home loans to Australian banks, up from 25% in 2004. This is an astonishing statistic, particularly when you consider the scale of the major Australian banks and their massive advertising spend to try and attract customers directly to them.
What isn’t quite as widely understood is that brokers can make an even bigger impact in the context of business lending, and a growing industry exists for those willing to take the fight up to one of the last bastions of bank arrogance: Business Banking. Statistics for business finance broking are harder to come by, but every conversation we’ve had with the banks tells us the same thing – it’s a rapidly growing phenomenon, and most estimate that up to one-third of business loans are now being introduced by brokers.
Here are four compelling reasons why smart businesses are opening their eyes to the enormous benefits of dealing with a finance broker:
1. Competition creates better outcomes.
It might sound trite, but banks are in business to make as much money as they can. Business bankers are generally remunerated based on the profit their loan portfolio generates for the bank; most people think that this just means bankers are always hungry for new customers, but this is only half the equation. The other half, which many don’t consider, is that bankers are also responsible for growing their portfolio revenue by charging the highest price possible for loans that they manage.
How can a business customer ensure that they’re in the strongest possible negotiating position when they apply for finance? The answer is to create competition. If you think that loyalty to your current bank will result in them reducing your interest rate, you’re wrong. In fact, loyal customers are usually the ones that pay the highest price, because your banker sees you as an easy mark in their quest for an end-of-year performance bonus. Customers who make the banker feel a little uneasy, or who create the spectre of competition with every dealing, are the ones that get the lowest price.
What’s the benefit of using a broker? Bankers know that brokers have strong relationships with a range of lenders, and if they hope to obtain (or retain) the business they will have to “sharpen their pencil”.
2. Banks change their policies frequently.
Just because you’re a longstanding customer of your bank and run a good solid business, does not mean your bank will always be consistent and loyal in its dealings with you. Many businesses have found out to their detriment that banks can (and do) change their outlook on various industries at a moment’s notice, sometimes for reasons as capricious as a bad IBISWorld report or simply the neuroses of an executive in Sydney. We’ve seen it time and time again – from Printing, to Mining Services, to Property, to Transport – one day they’re happily lending you money, the next day they’re increasing your interest rate, imposing quarterly reviews and hinting that perhaps you should bank elsewhere.
What’s the benefit of using a broker? Appetites for different industries vary from bank to bank. A broker will not only be familiar with the appetites and idiosyncrasies of all the different lenders at a given point in time, but will also have a solid knowledge of your business and will be well-placed to help you transition to a new lender if the need arises.
3. Banks change their staff frequently.
Ask most business owners how many bankers they’ve had in the past couple of years, and the answer will generally be at least two or three. Banks love to chop and change staff, whether it be due to promotions, layoffs or for myriad other reasons. This can get incredibly frustrating, as you have to explain your business over and over again to a new person who may or may not understand your industry. It’s a massive time-waster for business owners who don’t have much spare time to begin with.
What’s the benefit of using a broker? A broker is like a banker that never leaves. Because it’s their own business, a broker’s main goal is to get consistently good outcomes for their clients over the long term. They will develop an in-depth understanding of your business, which they can then communicate to your lenders on your behalf, saving you a massive amount of time.
4. A bad banker can kill a good deal.
Bankers are not just salespeople, although it often seems like they are. In fact, they are your primary advocate inside the bank, and the conduit through which all information about your business is communicated to those who make lending decisions. It follows that bankers should have an intimate understanding of the various aspects of business, to allow them to intelligently and articulately explain and argue the merits of lending money to your business.
Why should you care? Because banks make lending decisions based on the perceived risk of the client. A bad banker can negatively affect your business in a multitude of ways. At worst, you can find it difficult to access funding because the banker can’t convince the decision-makers to approve your loan applications. But even if the situation doesn’t get to that point, you can still find your loans priced much higher than they should, because the bank sees you as being a higher risk than they should. Credit departments within banks are naturally conservative, so if your banker can’t explain why you’re a good risk, they’ll assume you aren’t. We’ve seen some lenders charge up to 3-4% more than they should because they didn’t understand their customer, which for most businesses is a substantial amount of money.
What’s the benefit of using a broker? Since the GFC there has been a further exodus of talent from banking, many disenfranchised with what they saw as poor treatment of longstanding customers and a deterioration in culture. Good bankers still exist – you just need to know where to find them, and that’s where a good finance broker can help. Finance brokers deal with banks and bankers every day of the week, and they won’t use bankers that don’t have a proven track record of success.