Better Off Going For Brokers

Brokers can often negotiate more favourable terms for small businesses, writes Mark Fenton-Jones.
Article produced by www.afr.com.au

Business advisers are predicting that as the cost of business finance goes up, small to medium-sized businesses will make greater use of finance brokers to get a better money deal.

"Traditionally, the major banks would have captive SME customers who would put up with substantial margins on the base interest rate, up to 2 or 3 percentage points, due to inertia or just because they didn't know any better," said Robert Powell, a director in BDO Kendalls' business advisory services.

"This was a great situation for the banks because they were able to take advantage of the loyalty factor to maximise profits. "SMEs are a lot better educated now and they know that the way to get the best terms on a finance deal is to get the banks to compete against each other. Which is exactly what brokers do."

Mr Powell, who advises any clients re-evaluating their finance facilities to talk to a broker, said that virtually all who went this route now used a broker. The motivation for switching from a bank to a broker was either because the existing finance was too expensive or they were dissatisfied with other parts of their current deal.

A broker can compare the loan requirements of up to 60 providers on its database and negotiate a better deal on behalf of the business owner. Avanti Commercial, for example, has 57 lenders on its books, including all the major banks, as well as super funds, private funds and institutional funds.

"With these deals it's all pricing for risk," said Paul Heilig, the head of lending for Centric Wealth, which specialises in providing wealth advisory and accounting services. "The banks are looking to take as much security as they can,

including the personal security. We are able to unravel that and help with the structuring of the debt, working closely with accountants." In 1999, Mr Heilig and Sheyne Walsh established Kingsbridge and Eagle, a boutique brokerage house with a portfolio of nearly $1 billion under management that became part of Centric in August 2007.

"There's definitely been an increase in SMEs using brokers and third-party firms like ourselves," Mr Heilig said. Though room for negotiating in the home-loan market is limited, in these commercial transactions, the broker endeavours to show the lender that the security they want for their funds is excessive.

"The more we mitigate risk, the better pricing that we get on behalf of the client, and that is really our function," Mr Heilig said. For instance, the loan might have restrictive covenants and conditions, which can be costly and time consuming, especially when it requires annual reviews and audits. I 'A lot of what we do is to negotiate those things out of the loan agreement," Mr Heilig said.

"By limiting the restrictive covenants and by limiting the conditions, what we are actually doing in the long term is saving those businesses money and time." Customers of brokers usually pay nothing for a loan sourced by a broker - the bank pays the brokerage - unless it is a large complex transaction that attracts a separate fee.

Asked how much small businesses can expect to slash off their loan costs, brokers declined to make a general statement, emphasising that each deal was different.

"But what we find is that if clients have approached banks directly and then they come to us, we are able to normally get them better rates than the marketplace," Mr Heilig said. The national president of the 9000-member Finance Brokers Association of Australia, Peter White, said more brokers were training for commercial lending. The association was established in 1992.

Mr White, who is also managing director of Avanti Commercial and specialises in the commercial sector, described the lending volumes at his firm as bottoming out in November before the election, before climbing back in December to double their historical levels for that month, and almost tripling the usual volume this month.

January is usually a quiet month for the industry, but Mr White described the market take-up this month as "mind-boggling".