Asset assistance – Part 2
Last month, The Adviser took a look at the support that aggregators can provide to brokers when writing asset finance. (Take a look back at the August edition of The Adviser if you missed it.) In the next part of this asset finance series, The Adviser looks at the key differences between writing this type of loan compared to residential mortgages.
Speaking to The Adviser during a live webinar in June (The Adviser Live – EOFY Special: Asset finance in focus), Brent Starrenburg – head of Connective Asset Finance, part of the Connective group – explained that asset finance is about “almost anything that helps a business operate”.
“Some things you wouldn’t even think of,” he said. “I’ve seen things like a metal detector on a food line at a bakery. It obviously had a series of conveyor belts and packaging, and all those things, and right at the end, it had to go through a metal detector. So, that had to get financed, for example, just to make sure that the baked goods that are on the shelf in the store don’t have any contaminants or metal in it.”
According to Mr Starrenburg, asset finance deals are “a very different sale” to a mortgage because the deal is “about the repayments as opposed to the interest rate”.
“We’re talking about a [shorter] amount of time that the asset is being financed over,” the head of Connective Asset Finance elaborated. “If you take a typical home loan, you’re looking at a 30-year term, so an interest rate change can have quite an impact on that amount because we’re talking 3 or 4 per cent, $500,000 and over a 30-year term.
“Typically, in the asset space, the dollar size or the average ticket size is a lot lower. We tend to see average deal sizes of around $60,000-$70,000. And then that’s usually on a maximum term of about five years. So, the interest rate doesn’t have as big an impact on the actual term of the payments, etc.”
Top things to consider
When writing an SME deal, brokers need to understand how the asset that the client is looking to buy – or the fit-out, the stock, or the short-term cash flow – is going to help the business in the short, medium and long term, Mr Starrenburg said.
“A lot of the time it’s an income-generating piece of equipment.
So, could this piece of asset actually take this business to the next level, or is it going to get rid of a lot of overheads with maintenance and things like that? So, there’s quite a few components that brokers need to understand for that SME,” he said.
“Then it’s about understanding what the equipment is, how long the company has been registered and trading for, how many directors there are, how it is set up, are the directors’ property-backed, etc. And you need to have an understanding of the financials. So, I would definitely recommend that you still need to understand how to read a P&L and balance sheet,” he continued.
According to Mr Starrenburg, having an understanding of the business’s financials (and whether a client is full doc, alt doc or low doc) will mean that a broker can better understand what product and lender they can use.
He concluded: “There’s a lot of nuances in asset finance writing, so you need to understand what it is you’re trying to do and achieve for that particular SME as opposed to the mortgage space, where it is about buying a house and knowing whether the borrower can afford it.
“In this space, you’ve got to understand the business a lot more and understand what it is the asset is going to bring to the business.”
Mr Starrenburg therefore said he had seen “a lot of mortgage brokers tend to go headfirst with a rate, as opposed to the repayments”.
He added: “I believe the key is to understand that not everything is what it is on face value. You have to actually understand what those repayments are, understand the ins and outs of whatever the ongoing repayments are. Is there a balloon on it? Is there no balloon? There’s a lot of things that they have to understand. And from an aggregator’s perspective, that’s our job to educate brokers on that side of things. And we do, do that.”
Indeed, Connective Asset Finance runs workshops for mortgage brokers to help them understand how to write asset finance, provides a processing hub for assistance, and delivers ongoing training.
Find out more about asset finance and how to break into this area in Part 3 of Asset Assistance – out in the October edition of The Adviser magazine.
First published in The Adviser, 8 September 2019.