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Mecardo Blog

Is the traditional financing model broken (or brokered)

Posted by Olivia Agar on 15 January 2018
Olivia Agar

The nature of financing for small to medium businesses, particularly in rural communities, isn’t quite what it was 20 years ago. Relationships with a single bank, spanning generations are increasingly rare. For farmers and rural businesses, rationalization of regional banks and the revolving door of bank managers causes disruptions to customer service which has stripped away much of the appeal and reduced the value of having a longstanding relationship with a bank.

Small business owners are now placing more value on a personalized approach to finance, seeking greater flexibility and support from their lender which is driving them to search for alternative options or a more competitive offer on their finances.

However, desire does not always lead to realization, especially when the process is as arduous and draining as for finding a new business loan.

Bank lending to small businesses is at an abysmal rate. It’s estimated that only half the potential small business lending market is successful in gaining capital each year. The lack of attraction for big banks to small businesses lending is understandable. They face increasing regulation and risk caution, and make less profit on small loans. As a result, they’re more demanding than ever of having the customer provide business history, tax returns, yield reports, farm plans, budgets and cash flow documents.BEGGING BOWL.png

For small business owners in agriculture the sell point to a bank is particularly tough. Volatility, risk and farming go hand in hand, which puts a great deal of pressure on getting the application and business documentation right. The process can be cumbersome, time consuming and requires you to know your stuff, which is a big enough deterrent to refinancing or switching lenders that many stick it out with their current providers, often missing out on the best rates. 

This complacency or, particularly with farmers, loyalty to a bank, is costly. The perception that loyalty is rewarded is mostly misconception. The residential market has caught onto this, yet the rural small business market appears to be lagging and still financing through traditional strategies.

What is the residential market doing differently? They’re using brokers.

The broker does not possess superpowers, but relies on their intellect, will, sense of justice and network associates to communicate with a range of lenders and negotiate the best deal for a small business. Their service comes at a cost of course, but to the lender which they sign the contract with, not the small business owner.

What does a broker offer?

Time: They take the task off your hands. Saving you time searching for the best lenders, talking to your accountant and putting all your documentation together.

Expertise: A broker knows how to best position a business to the banks. It’s their job to understand the needs of the bank but be able to negotiate from the point of view of the business. They can cut through the bells and whistle claims of bank and lender marketing campaigns to get the benefits that are actually useful to your business.

Local knowledge: A regional based broker knows the market that your business operates in, and should have a good understanding of the region and seasonal conditions. They will also know which lenders have an appetite for your type of business so won’t be wasting time fighting for those that don’t.

Network: They have relationships with a wide range of banks and lenders as well as contacts on the ground that provide current market intel.

Convenience: A broker works with your accountant and bank to get the best outcome. They should be an easy point of contact that brings back the personal relationship to financing.

Michael Tonkin, Ruralco Finance Broker in Ballarat explains “Many rural small business owners are worried that a broker is going to disrupt their long-term relationship with the bank by making them switch to another lender. But it’s better for everyone if you don’t have to refinance to another lender. If we can improve a customer’s rate or their terms of finance with their current provider whilst at the same time giving them a stronger relationship point or continuity of knowing who they are working with that’s an ideal outcome.”

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However, the pathways to a small business loan do not cease with brokers and or direct to lenders. Online brokers such as eBroker.com.au use algorithms to assess eligibility and match businesses with appropriate finance products from non-bank lenders. Comparing lenders is made easy through these platforms, but for farm owners, local on the ground knowledge and expertise is generally advisable to match the right product and lender for their business.

 

Peer to business lending is also gaining momentum through organisations such as SocietyOne. Instead of borrowing from a traditional lender, a business is matched with investors using a financial service provider as the lending platform.  This system is still in its infancy in Australia but has potential as an affordable, no frills loan system for remote businesses as it progresses.

As the business lending model is evolving and more products and lenders are coming forth, the opportunity for small rural businesses to gain funding or improve their current loan to a more personalised service is there.

If the copy of The Barefoot Investor I got for Christmas has taught me anything, it’s that putting aside the time to do some research and ask questions can be very worthwhile in the long-term.

It's also worthwhile reading this summary by fellow Analyst Andrew Whitelaw on disruptive financing models in Agriculture, written in early 2016.

Read: Disruptive Financing Models in Agriculture

Topics: financing

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