Why and how brokers should diversify into cash flow lending
Brokers who branch out into products such as cash flow lending can use it to their advantage by uncovering hidden value in their databases, building new revenue streams and future-proofing their businesses. We spoke with Stephen Hale, Head of Marketing and Communications for the Mortgage & Finance Association of Australia, who says diversification offers multiple benefits for brokers prepared to offer new products.
Uncover hidden value in your client base
“The main reason for residential brokers to diversify is to look after the long-term needs of their client base and uncover hidden value based on their needs,” Hale says.
“Clients go through a life cycle of buying a house, then a car, then a business, and their broker becomes their trusted credit adviser. Many brokers have been involved in lending to families across generations.”
Brokers who can provide the right product or service for their clients at each of these key life stages have the potential to uncover the hidden value of their database, putting them one step ahead of the competition.
Prospa Tip: Segment your database based on their key financial needs so you can deliver the right financial product at the right time.
Build additional revenue streams
Hale says that, five years ago, most brokers were only doing residential mortgages, while a lot of commercial and equipment lending was done by specialists. But now about 3,000 of Australia’s 17,000 residential brokers have diversified into commercial lending.
“Residential brokers wrote about $18 billion in commercial and equipment lending in the past year,” he says.
With the addition of new technology to the industry, changing regulations and new competition, diversification makes sense. This is particularly true for brokers who want to protect their business and income stream from external challenges such as changing compliance laws and digital disruption.
“The advantage from the broker’s point of view is that you have a menu of services – secondary lines of income that are a healthy addition to your residential-mortgage business – it’s a great way to keep your clients happy, build additional revenue streams and avoid pigeonholing your business.”
Diversification and cash flow lending
Hale says cash flow lending was traditionally conducted through banks and finance groups, but fintech lenders have introduced a system that makes it easy for brokers to diversify into cash flow lending.
“Cash flow lending is short-term lending, but mostly done online so there is far greater speed and ease of access for customers,” he says. “The financial technology revolution has brought new entrants into the market, and that means healthy competition.”
Prospa Tip: Look for a cash flow lender who offers ‘factor rates’ to protect your clients from interest-rate fluctuations.
Many small business owners feel their finances are quite complex, and are more comfortable dealing with a broker than with a bank or finance company. These clients will be grateful if their broker can find them a short-term loan to get additional stock for the pre-Christmas rush or for Valentine’s day, or to buy equipment that comes on the market quickly.
“A client will need funds fast if the truck dealer says, ‘You can have a discount on these fleet vehicles, but you’ve only got 10 days to get money,’” Hale says. “Fintechs like Prospa use propriety technology to assess the creditworthiness of the client and quickly provide an answer, so you as a broker can stay focused on your business.
“The lender does the hard work, while the broker maintains the relationship. That means the lender deals with the borrower, but the broker receives the benefits.”
Some brokers may be reluctant to diversify because they perceive commercial lending as risky. But Hale says cash flow lending is low risk from the broker’s point of view.
“With pure commercial lending, you need to be able to read a business’s profit-and-loss statement and see the holes in it,” he says. “But new fintechs like Prospa make it easier and quicker for brokers to test their customer base with cash flow loans.”
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