A home for overlooked borrowers

A valuable tool for underserved borrowers, specialist lending provides finance to people in all kinds of situations. Providing lending solutions for customers ranging from those with poor credit histories to business owners who need to purchase equipment, it can be a great addition to a broker’s toolkit.

After a year like 2020, specialist lending may prove to be even more useful as borrowers deal with the after-effects of the pandemic, particularly now that JobKeeper, repayment deferrals and other lending initiatives have come to an end. As states across the country continue to see outbreaks of COVID-19 cases and sudden lockdowns in reaction, Australians are continuing to face changes to their employment – all without the government support that was in place last year.

Non-banks traditionally provide specialist lending for borrowers who are pushed out by the mainstream banks’ strict lending criteria. La Trobe Financial’s chief lending officer, Cory Bannister, says the events of 2020 are “certainly likely” to create further demand for specialist non-bank solutions.

“The coronavirus quickly became one of history’s most economically disruptive events, and regardless of whether the impact was positive or negative for consumers, it is almost certain to have produced some volatility in their income and expenses, both of which can cause challenges when applying for ‘vanilla’ loans with major banks in the near future,” Bannister says.

Believing that the banks are unlikely to reverse their long-term simplification strategies focusing on prime home loan borrowers, he says La Trobe Financial is “ready to lean in and assist”.

Due to the custom nature of their credit assessments and willingness to take the time to fully understand a customer’s unique position, Bannister says non-banks are ideally suited to providing credit to a wide range of applicants, as they can offer tailored solutions to meet customers’ objectives and requirements.

“Simply put, specialist loans generally require a conversation with each borrower in order to fully understand the application before an approval can be made,” he says.

“There might be a detail within the application that fails traditional scoring models; however, upon review, it is easily explained and forms part of an entirely reasonable and suitable transaction – this can be full- or alt-doc, impaired or prime.”

Another case for specialist loans becoming more prevalent is the growth of the gig and freelance economies, as well as the rise of the e-commerce industry. Bannister says these are creating a greater need for specialist lending solutions due to the “temporary and transient nature” of borrowers’ employment in these areas.

“The issue for people who are working in these industries and looking for finance is that the irregular nature of their employment often means that they sit outside major banks’ loan acceptance criteria,” he says.

“Without specialist lenders that can assess their applications manually, they are frozen from the market.”

Helping credit-impaired borrowers

Even borrowers with PAYG employment may find that they need specialist loans. Credit-impaired borrowers with past defaults or arrears on their loans will typically be turned away from mainstream banks until a significant amount of time has passed since those impairments.

Specialist lending gives these borrowers the chance to consolidate their debts and meet their goals of homeownership.

Bluestone has specialist loan options that help borrowers get back on track financially and then transition to prime lending in the future. COO James Angus says the non-bank does not use automated credit scoring but takes the time to get a broader view of a borrower’s financial situation to determine whether they can repay their loan.

He explains that offering loans to these customers, particularly in a year like 2020, does not mean there is a greater risk.

“As part of our responsible lending obligations, Bluestone requires borrowers to demonstrate that they have recovered from any temporary hardship caused by COVID-19,” Angus says.

“We’re always very careful to make sure that we assess all our home loan applications, specialist or otherwise, to ensure that the borrower can meet their repayments without financial hardship.”

Since the outbreak of the pandemic, Bluestone has seen a larger proportion of specialist borrowers requiring extra support, when compared with those applying for prime or near prime loans, which refl ects the importance of the ongoing support that brokers can provide to clients in this segment of the market.

Around 33% of specialist borrowers have needed additional hardship support since March 2020, compared to 12% of prime borrowers and 27% of near prime.

While there was strong demand for specialist loans last year, Angus says there was the same level of activity across all borrower segments. Bluestone is seeing more and more mortgage brokers come to the non-bank for specialist lending solutions, however. As the major banks tighten their lending criteria, brokers are  searching for more fl exible solutions.

“Many borrowers who were previously able to get approved by mainstream lenders are now being rejected, and brokers are recommending alternative lenders who can off er a more flexible solution,” Angus says.

“Specialist lending creates opportunities for brokers to help more customers, and to  help their current customers when they are going through challenging times.”

Lender's take

MPA: What do you need from brokers who are submitting a loan application?

Cory Bannister, La Trobe Financial: The key is to understand the borrower’s situation and be able to communicate that clearly to the lender. The more information we have up front, the quicker and easier we can provide a solution. The key tips that a broker should follow include:

• Listen carefully and keep an open mind
• Ask for the whole truth and nothing but the truth
• Complete “reasonableness tests”
• Educate clients about their options,  both now and in the future
• Speak to a specialist lender early in the process

By following these tips, a broker is well equipped for packaging a specialist loan.

Specialist loans for businesses

Another segment of the market that often requires specialist lending is business  customers. Traditional lenders have typically not had the credit appetite to service SME customers, particularly those who cannot provide asset security.

At SME lender Moula, specialist lending means taking a “heads and heart approach”, says head of strategic partnerships Sam Sfeir. Moula uses data to assess a client’s application so that they don’t need to put up property or other assets as security.

“[It] makes all the difference in delivering a specialist lending experience, as it allows us to go deeper into an underwrite to get a better understanding of business performance and serviceability,” Sfeir says.

Moula saw greater demand for loans after the onset of COVID-19 last year. Where initially business confidence took a big hit, there were clear signs the Australian business community was recovering by the middle of 2020.

By the end of the year, having worked through the uncertainty to find new opportunities, many of Moula’s customers were looking to expand and hire new staff again.

“The pandemic caused significant disrup tion across and within industries and reinforced the need to view each and every business on a case-by-case basis,” Sfeir says. “We saw more businesses looking for fast turnarounds and placing a greater value on tailored solutions through COVID-19. By leveraging machine learning and artificial intelligence, we can deliver faster outcomes to brokers and their clients and capture any nuances of a business’s unique needs.”

Moula’s ability to look at loan applications differently does not necessarily mean it can lend in every scenario. But Sfeir says what the lender can do is try to provide decisions as quickly as possible so that brokers get the answers up front and are able to better service their clients.

Over the past few months, Moula has reduced its credit decision times and can usually deliver a decision in under two hours for loans for less than $50,000 – which has led to increased lending activity.

“While we provided more support to borrowers through the initial phases of the pandemic, which included mobilising teams to answer pressing questions and off er repayment pauses, many of those same borrowers are now seeking funding to grow their businesses, and demand for business funding has increased significantly through 2021,” Sfeir says.

Lender's take

MPA: What do you need from brokers who are submitting a loan application?

James Angus, Bluestone: There are a range of diff  erent ways brokers can prove their customers’ income and expenses. As well as our full-doc options, we have a full range of alt-doc options, such as BAS statements, business bank statements and accountant’s declarations for self-employed customers.

Because we don’t take a one-size-fi ts-all approach, we may ask for additional supporting documentation so we can get a strong understanding of the borrower’s history and circumstances. I’d always suggest brokers get in touch with their Bluestone BDM to discuss specifi c requirements, especially if they’re submitting an application for one of our specialist products.

Fast finance needed by SME owners

Also focusing on the SME market, OnDeck Australia experienced an increase of almost 90% in loan applications in the final quarter of 2020 compared to the previous quarter. The rise was evidence of the number of SMEs on the road to recovery, says CEO Cameron Poolman.

The lender’s own research has shown that one in four SMEs get knocked back for bank finance; of those that do secure funding, 25% have experienced negative impacts as a result of the delay taken to get that finance.

Poolman points out that over the last 12 months the need for specialist SME lending has become even more critical.

“SMEs have a well-deserved reputation for being nimble, and during lockdowns we saw many SMEs pivot away from their core business to embrace new product lines, new ways of generating revenue, and explore new markets – not just to survive but to thrive during a tough time,” he says.

“All this activity required an injection of funding, but finance was needed fast, not in a matter of weeks but within days or hours.”

OnDeck continued to lend throughout 2020 and work with broker partners to ensure they knew where support was available. The lender has educated brokers and SME clients over the last several years about the solutions it off ers and has seen an uptick in awareness.

Its research has backed this up. In 2018 OnDeck found that 30% of small businesses believed that the number of lending options had increased over the past five years; by 2020 that figure had increased to 36%. Among the larger SMEs that had applied for finance in the past, regardless of lender, awareness of specialist lending options is now at 48%.

The awareness of diversification opportunities is growing too.

“We have seen an uptick in brokers looking to expand and diversify beyond home loans,” Poolman says.

“This makes a lot of sense for brokers, especially as our own data shows that one in four of a broker’s home loan clients are likely to be SME owners – so brokers could have a significant untapped market of potential SME customers in their own database.”

Nothing to fear from specialist lending

Since it was established in 1952, La Trobe Financial has seen a lot of change in the industry, including greater awareness of non-banks and specialist lending. As the major banks continue to change their risk appetite and target customer profile, particularly if the proposed amendments to the responsible lending guidelines pass, Bannister says this will leave even more borrowers overlooked.

He reassures brokers that there is nothing to fear when dealing with specialist or near prime borrowers; however, there should be an increased level of caution.

“Like anything, where there is elevated risk, you simply need to take steady and appropriate measures to ensure the risks are appropriately mitigated or managed – if they are, or can be, you can proceed. If not, you don’t,” Bannister says.

At La Trobe Financial, he says brokers will soon realise there is no diff erence between a broker’s approach to selling a mainstream loan and the way they sell a specialist loan.

“For us, the process is the same, and by following responsible lending guidelines, making reasonable enquiries as to the borrower’s financial situation, requirements and objectives, brokers are well equipped to complete a specialist loan application,” Bannister says.

Angus points out that there are borrowers who would have been considered prime just five years ago who cannot get a loan today with a major bank and instead fall into the category of specialist borrowers. However, although Bluestone has seen an increase in the number of borrowers who realise the value of a lender that will take the time to get to know a customer’s individual circumstances, many mortgage brokers are still shying away from the offering.

There’s a misconception that specialist lending means lenders do not properly assess whether a customer can repay the loan. Some brokers also believe that specialist loans are too di cult, Angus says.

“Brokers can also be deterred from offering specialist products in situations where lenders have overly complex documentation requirements and assess-ment processes,” he adds.

“This can lead to a poor customer experience as well as lengthy turnaround times. At Bluestone we strive to keep documentation requirements as simple as possible, and our turnaround times are currently among the fastest in the market, even for our specialist products.”

Lender's take

MPA: What do you need from brokers who are submitting a loan application?

Cameron Poolman, OnDeck Australia: OnDeck understands that SME owners are time-poor. So we have a very streamlined application process. Our simple, online loan application process involves a one-page form and a maximum of six months of bank statements, which can be uploaded directly to OnDeck.

We don’t ask our customers for upfront security on loans up to $250,000, so SMEs don’t have nominate a house or another asset as security; we just ask for a personal guarantee.

Brokers missing an opportunity

As competition has grown in the SME lending space, so has awareness of specialist options. Sfeir says Moula is “on a mission” to facilitate better access to finance, and increased competition in the market is a big win for business owners.

“As more specialist options emerge, specifically in the market of unsecured finance, customers are shifting their expectations, and banks are improving their own service levels,” he says.

“While it’s difficult to improve legacy infrastructure, and some are still taking weeks to process loan applications, the banking sector has definitely woken up to the challenge that fintechs and specialist lenders like ourselves present.”

While SME owners seeking finance for their businesses have diff erent needs than residential borrowers, the timing of the finance remains crucial for both borrower segments. Specialist loans are ideal for outcome-oriented businesses with time-sensitive needs, says Sfeir.

Mortgage brokers are “missing an opportunity”, though, as they focus on their core products in residential lending. Understanding that commercial lending can be nuanced, Moula has introduced a light referral process to make it easier for mortgage brokers to simply refer a client with their basic contact information and have Moula manage the application directly.

“We’re just starting to scratch the surface with mortgage brokers diversifying into commercial lending,” Sfeir says.

“With business confidence recently hitting a seven-year high in April 2021, there’s so much potential for mortgage brokers to diversify and offer a new product to their SME clients.”

Needing to approve funds quickly is a “critical aspect” of SME lending, Poolman adds, explaining that OnDeck can provide loans of up to $100,000 in under two hours. These funds may be needed to take advantage of discounted trading stock or fund a good deal on equipment, or the business may need finance to engage and train new staff .

“Whatever the case, businesses cannot afford the protracted loan approval times that go hand in hand with mainstream lenders,” Poolman says.

“Equally, business owners don’t want to be sidetracked from their day-to-day business activities by laborious and time-consuming loan application processes.”

With the commercial market becoming more complex, Poolman says the days of offering “all things to all customers” are long gone. OnDeck is able to provide a tailored approach to the needs of SMEs.

“While ‘one-size-fits-all’ may be fine if you’re in the market for a tennis racquet, it’s not appropriate when you’re seeking finance for a small business,” he adds.

“We provide fair pricing and clear terms, and we have championed the use of the SMARTBox loan comparison tool in Australia. This allows brokers and business owners to understand the true cost of business finance and make informed decisions around the return on investment of any asset being financed.”

Brokers should be confident that their small business clients will be receptive to a specialist lender, Poolman says. SMEs have already had to adapt so much in recent years that they will recognise lenders who have done the same, particularly when it comes to adapting to new technology.

“It’s likely that brokers will be pleasantly surprised at how many of their SME customers are eager to embrace specialist lenders – especially those, like OnDeck, that are genuinely committed to the small business community.”

Lender's take

MPA: What do you need from brokers who are submitting a loan application?

Sam Sfeir, Moula: Submitting an application to Moula is simple, online, and can be completed in just seven minutes. We’ll consider your clients with active ABNs or ACNs who have been in business for at least six months and can show at least $5,000 in monthly sales.

We’ve tailored our off  ering to brokers, so you can choose to work in a way that best suits your business. As a broker, you can manage your client exclusively by submitting a full application, which takes seven minutes to complete, or submit a simple ‘tick and fl ick’ referral for us to work directly with your clients to tailor finance to their needs.